How to Calculate Hedge Fund Fees
Hedge fund fees are a management fee charged on assets plus a performance fee charged on gains, so the investor keeps the gross gain minus both.
The Hedge Fund Fees formula
Calculator
Enter the amount invested, the gross return and the two fee rates to see what the manager takes and what you keep.
The capital the investor commits to the fund.
The fund's return before fees. Enter a negative number for a losing year.
Charged on assets every year, win or lose. The 2 in 2 and 20.
Charged on the gain only. The 20 in 2 and 20.
After both fees the investor is left with $60,000, against $40,000 paid to the manager.
- Gross gain before fees
- $100,000
- Management fee
- $20,000
- Performance fee
- $20,000
- Net return to the investor
- 6%
- Fees as a share of the gross gain
- 40%
The holdings move by $100,000 before a single fee comes out.
The fee on assets comes to $20,000, and it is owed whether the year is good or bad.
The manager takes $20,000 of the gain as the incentive fee.
The headline gross return shrinks to 6% once fees are paid.
40% of the gain goes to the manager, and that share rises as the gain gets smaller because the management fee does not.
How to calculate Hedge Fund Fees, step by step
- 1Work out the gross gain. Multiply the amount invested by the fund's gross return, the return before any fee is deducted.
- 2Charge the management fee on assets. The management fee is a percentage of assets under management, so it is owed in a losing year exactly as it is in a winning one. It is the 2 in 2 and 20.
- 3Charge the performance fee on the gain. The performance fee, also called the incentive fee or carried interest, is a percentage of the gain rather than of assets. It is the 20 in 2 and 20, and it is zero when the fund loses money.
- 4Subtract both fees. Investor's net gain = gross gain − management fee − performance fee. Dividing that by the amount invested gives the net return the investor actually earns.
- 5Compare the fees with the gain. Divide total fees by the gross gain to see what share of the profit the manager keeps. That share climbs sharply in a year with a small gain, because the management fee is owed either way.
Worked example: Hedge Fund Fees
An investor puts $1,000,000 into a fund charging 2 percent of assets plus 20 percent of gains. The holdings gain 10 percent gross, which is $100,000. The management fee is 0.02 × $1,000,000 = $20,000 and the performance fee is 0.20 × $100,000 = $20,000, so fees total $40,000. The investor keeps 100,000 − 40,000 = $60,000, a net return of 60,000 ÷ 1,000,000 = 6 percent, and fees take 40 percent of the gross gain. Had the fund instead lost 10 percent, the investor would be down $100,000 and would still owe the $20,000 management fee.
Hedge Fund Fees questions
What does 2 and 20 mean?
It is the traditional hedge fund fee schedule: 2 percent of assets a year as a management fee, plus 20 percent of gains as a performance fee. The two rates are set separately in the fund documents, and competition has pushed many funds below both numbers.
Does the manager take a performance fee after a losing year?
No. A high-water mark bars the performance fee until the fund climbs back above its previous peak, so the manager is not paid twice for the same gain. The management fee is still charged on assets, which is why a losing year still costs the investor money.
Is the performance fee taken on the gain before or after the management fee?
Funds differ and the offering documents settle it. Charging the performance fee on the gross gain, as above, is the simpler convention and the one used in textbook problems. Deducting the management fee first leaves a smaller base and gives the investor a slightly larger net gain.
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