Paper
Journal of Derivatives & Hedge Funds (2007) 13, 220–232. doi:10.1057/palgrave.jdhf.1850067
Delegated portfolio management: Are hedge fund fees too high?
Practical applications
Hedge funds are often criticised for the high level of their fees compared to mutual funds. The reality is that (i) when properly calibrated, performance fees are a useful tool to attract talented managers and give them an incentive to perform, and (ii) hedge funds often charge less for active management than traditional mutual funds.
aEcole des HEC, University of Lausanne, 1015 Dorigny, Switzerland. Tel: +41 79 4381753; E-mail: f@lhabitant.net
1Francois-Serge Lhabitant is the Chief Investment Officer at Kedge Capital. He is a professor of finance at HEC Lausanne and at EDHEC, a visiting professor at Hong Kong University of Science and Technology, and a member of the Scientific Council of the Autorité des Marchés Financiers, the French regulatory body. The views expressed in this paper are solely those of the author.
Received 5 April 2007; Revised 5 April 2007.
Abstract
Mutual fund investors just beginning to venture into alternative investments usually find the level of fees overwhelming, and may be tempted to dismiss the hedge fund industry. In this paper, we discuss the pros and cons of asset-based fees versus performance-based fees. We also compare the fees for true active management charged by traditional and alternative asset managers, and show that hedge funds are often less expensive than mutual funds.
Keywords:
hedge funds, management fees, portfolio management, compensation contracts, performance fees, alpha
