Stay informed with free updates
Simply log in to Hedge funds myFT summary — delivered straight to your inbox.
Hedge fund investors have paid out nearly half of their profits in fees since the industry’s early days more than half a century ago, new data shows.
Managers made $3.7 trillion in total gains before fees, but fees charged to investors totaled $1.8 trillion, or about 49 percent of gross gains, according to an analysis by hedge fund investor LCH Investments.
The figures, which date back to 1969, show that the scale of compensation received by managers has jumped as the industry has matured.
“Until 2000, hedge fund fees accounted for about a third of total earnings, but since then they have risen to half,” he said.
Rick Sopher, CEO of Edmond de Rothschild Capital Holdings and Chairman of LCH Investments. “As returns fell, fees rose.”
The new research comes after the world’s 20 best-performing hedge funds posted their biggest profits on record in 2024, according to LCH — for the second year in a row and against a backdrop of rising equity markets.
The standout performers last year, delivering the best returns without fees, were three multi-strategy hedge funds: DE Shaw, Izzy Englander’s Millennium Management and Ken Griffin’s Citadel. They also have some of the highest total fees.
Citadel cemented its position as the most profitable hedge fund of all time in 2024, topping the list for the third consecutive year, with DE Shaw and Millennium in second and third place.
The top 20 managers in the $4.5 trillion hedge fund industry generated a combined profit for investors of $93.9 billion in 2024, LCH said, up from the previous record of $67 billion in 2023.
Together, the top 20 generated asset-weighted returns of 13.1 percent, significantly outperforming the average hedge fund, which returned 8.3 percent, according to other data from Hedge Fund Research.
Managers in the top 20 had significantly lower total compensation of just over one-third of gross profit, compared with 55.7 percent in the rest of the industry since inception, LCH found.
Hedge funds have historically been known for their “two and 20” fee model, where investors pay 2 percent management fees and 20 percent performance fees on investment gains each year.
However, it has come under pressure since the global financial crisis, as investors complained about the performance and lack of protection against market downturns.
The increase in total fees from 30 percent to about 50 percent of gross profit is mainly due to higher management fees, according to LCH.
While management fees consumed less than 10 percent of gross profits in the late 1960s and 1970s, they represented nearly 30 percent in the past two decades, LCH said.
The shift suggests that efforts by institutional investors and investment consultants to cut fees across the board have failed, with management fees eating up more of the returns while gains have been shrinking.
The fastest-growing part of the hedge fund industry was multi-manager platforms, which increased average fees, according to prime brokers.
Such companies have a “pass-through” cost model, where the manager passes all costs on to end investors instead of taking an annual management fee.
This can cover office rent, technology and data, salaries, bonuses and even entertainment for clients. It usually varies from 3 to 10 percent of assets per year. A performance fee of 20-30 percent of profits is usually charged on top of that.
LCH’s list calculates which managers are the most successful based on the cumulative dollar earnings they have generated for investors, net of fees, since inception. The sources for the calculations were LCH’s internal estimates, as well as data from Nasdaq eVestment and HFR.
Sopher said that LCH as a fund would close this year, but that Edmond de Rothschild would continue to invest in hedge funds through other funds within the group.
LCH, one of the world’s first hedge funds, was founded in 1969. The value of one share, if bought at the launch of the fund, has multiplied 172 times by December 31, 2024, representing a return of 9.8 percent per annum.
