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Investors in hedge funds have paid out nearly half of their profits in fees since the industry’s early days more than half a century ago, new data show.
Managers generated $3.7tn of net profit before fees, but fees charged to investors were $1.8tn, or about 49 per cent of gross profit, according to analysis by LCH Investments, a hedge fund investor .
Statistics, as far back as 1969, show how the scale of fees collected by executives has increased as the industry has grown.
“Until the year 2000, hedge fund income accounted for about a third of the total return, but since then it has risen to half,” he said.
Rick Sopher, chief executive of Edmond de Rothschild Capital Holdings and chairman of LCH Investments. “When rates went down, rates went up.”
The new research comes after the world’s 20 most successful hedge funds posted the biggest gains in 2024, according to LCH – for the second year in a row and against emerging equity markets .
Last year’s top performers, offering the best deals, were three multi-asset funds: DE Shaw, Izzy Englander’s Millennium Management, and Ken Griffin’s Citadel. They also have some of the highest rates.
Citadel has confirmed its position as the most profitable hedge fund of all time in 2024, moving up the ranks for the third year in a row, with DE Shaw and Millennium in second and third place respectively.
The top 20 managers in the $4.5tn hedge fund industry made a total profit for investors of $93.9bn in 2024, LCH said, up from the previous record of $67bn in 2023.
In general, the top 20 products generated by assets of 13.1 percent, significantly more than the average hedge fund, which made 8.3 percent, according to some data from Hedge Fund Research.
The top 20 executives had a very low payout taking just over a third of gross profit, compared to 55.7 percent for the entire industry since its inception, LCH said. get.
Hedge funds have been known for their “two and 20” style, where investors pay a 2 percent management fee each year and a performance fee of 20 percent of the interest. investment.
However, this has been under pressure since the global financial crisis, as investors have complained about the performance and lack of protection against market falls.
The increase in fees generally ranges from 30 percent to about 50 percent of gross profit mainly due to higher regulatory fees, according to LCH.
While regulatory fees were less than 10 percent of revenue in the late 1960s and 1970s, they have represented nearly 30 percent over the past two decades, LCH said. .
The change suggests that efforts by institutional investors and investment advisers to cut fees across the board have failed, with management fees driving up more earnings as profits decline.
In the fastest-growing corner of the hedge fund industry has been the multi-manager platform, which has pushed up average fees, according to prime brokers.
Such firms have a “pass-through” cost model, where the manager passes all costs on to their final suppliers instead of taking an annual management fee.
That can cover office rents, technology and data, salaries, bonuses and even customer entertainment. It usually varies from 3 to 10 percent of the goods per year. An operating fee of 20-30 percent of profit is usually charged on top.
The LCH Index measures which managers are the most successful in terms of the dollar return they have generated for investors, net of fees since inception. The sources of the figures were LCH’s internal estimates, as well as data from Nasdaq eVestment and HFR.
Sopher said LCH as a fund will close this year but Edmond de Rothschild will continue to invest in hedge funds with other funds within the group.
LCH, one of the world’s first hedge funds, was founded in 1969. The value of one share, if purchased when the fund was launched, has increased 172 times until 31 December 2024, which is a return of 9.8 percent per annum.
