With storm clouds already building above the hedge fund industry, which as reported last night posted deplorable results in 2016 as only 32% of fundamental and quantitative funds outperformed their benchmarks according to JPM data – the worst performance this decade – leading to the largest redemption requests since the financial crisis, as over $100 billion was withdrawn from the industry last year, the latest shock to hedge fund investors, already displeased with underperforming the S&P for years, is the realization that they also pay for many if not all hedge fund expenses, resulting in substantial payments over and above those envisioned by the conventional 2 and 20% model.
The reason for their confusion and/or anger is simple: as Reuters points out, some of the more prominent hedge funds such as Citadel LLC and Millennium Management LLC charge clients for such costs through so-called “pass-through” fees, which can include everything from a new hire’s deferred compensation to travel to high-end technology. And it all adds up with investors often paying more than double the industry’s standard fees of 2% of assets and 20 percent of investment gains, which in light of recent performance has already infuriated countless investors leading to a historic outflow from active to passive managed funds.
Clients of losing funds last year, including those managed by Blackstone Group LP’s Senfina Advisors LLC, Folger Hill Asset Management LP and Balyasny Asset Management LP, likely still paid fees far higher than 2 percent of assets.
This post was published at Zero Hedge on Jan 19, 2017.
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