MFA's new educational presentation explains the fees associated with hedge funds and how they are used by hedge fund managers. Generally, hedge fund structures incur management fees and performance fees. Other terms explored in the presentation include high-water marks and hurdle rates. Of course, all hedge fund fees charged to any particular investor are based on contractual terms agreed to by the fund manager and the investor. While there is no such thing as a “standard” fee, there are a number of general terms that apply to hedge fund fees.

1. Hedge Fund Fees:
An Overview
Managed Funds Association | June 2014

2. Introduction
2
Professional asset managers, such as hedge fund managers, partner
with investors to help them meet their long-term financial goals. Just
as hedge funds invest in a diverse range of financial markets and
employ a variety of investment styles and strategies, fund managers
negotiate with investors to determine a fee structure to compensate
for their services.
This fee structure is often misunderstood, or misrepresented. The
following slides provide details and background on the types of fees
that hedge funds typically charge investors.
It is important to keep in mind that the following materials only present
general information about hedge fund fees, and the amount of fees
charged vary by hedge fund and investor. The fees charged to any
particular hedge fund investor are based on contractual terms agreed
to by the fund manager and the investor. In other words, everything is
negotiable and there is no such thing as a “standard” fee.

3. Types of Fees
3
Hedge fund fee structures are generally comprised of
two main components:
• Management fees
• Performance fees
Sometimes, investors will refer to these fees as “X
and Y” where X is the management fee and Y is the
performance fee.
1

4. 2 Management Fees
4
Hedge fund management fees are typically a small
percentage of the Net Asset Value of an investor’s interest
in the fund per year.
These management fees are designed to pay for the
expenses of the fund’s investment manager, which often
include:
• Employee salaries
• Office space / rent
• Technology / communications
• Utilities

5. 3 Performance Fees
5
Performance fees are sometimes also referred to as
incentive fees, as they are designed as an incentive for
fund managers to generate a profit for investors.
Unlike management fees, which an investor pays based
on the Net Asset Value of its interest in the fund, an
investor pays a performance fee only if the Net Asset
Value of its interest in the fund increases over a
specified time period.
Simply put, if the fund does not make money for its
investors, managers do not get a performance fee.

6. 4 The “High-Water Mark”
6
Many hedge fund performance fees include a “high-water mark:”
High-Water Mark: a provision serving to ensure that a Fund
Manager only collects Incentive Fees on the highest Net Asset
Value previously attained at the end of any prior fiscal year — or
gains representing actual profits for each investor.
This means if an investor suffers a period of loss in the fund, he
must first recoup those losses before the fund manager is able to
collect a performance fee on any future gains. High-water marks
are specific to each investor, and are calculated based on the net
asset value of the fund at the time of its investment.

7. 5 Hurdle Rate
7
Many hedge funds also employ a “hurdle rate” when
determining performance / incentive fees.
Hurdle Rate: a fund’s minimum investment return
necessary for a fund manager to start collecting incentive
fees. The hurdle is usually tied to a benchmark rate such
as Libor or the one-year Treasury bill rate plus a spread.
Hurdle rates are designed to ensure that investors are
charged appropriate incentive fees based on the
investment strategy of the fund.

8. 6 Fund Expenses
8
In addition to management fees and performance
fees, fund investors are also charged for the
expenses of the fund. These fund expenses are
based on contractual terms agreed to by the fund
manager and the investor, and are described in the
fund documents.
Examples of fund expenses include legal, accounting
and certain investment expenses incurred by the fund
as part of its operations.
Investors should review and understand these
expenses, as they are paid for out of the assets of the
fund.

9. For More Information
9
For more information, please visit
www.managedfunds.org.
For the definition of terms in this presentation and others
related to the hedge fund industry, please visit MFA’s
Hedge Fund Glossary, brought to you in partnership with
Latham & Watkins.
Follow MFA on Twitter: @MFAUpdates
Connect with MFA on LinkedIn