Hedge fund managers receive approximately half of investment gains in fees

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Hedge fund investors have paid out nearly half 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 amounted to $1.8 trillion, or about 49 percent of total gains, according to an analysis by LCH Investments, a hedge fund investor.

The figures, dating back to 1969, show how the size of fees received by managers has risen as the industry has matured.

“Until 2000, hedge fund fees were about a third of total gains, but since then they have increased by half,” he said.
Rick Sofer, CEO of Edmond de Rothschild Capital Holdings and President of LCH Investments. “As returns went down, fees went up.”

The new research comes after the world’s 20 most successful hedge funds posted their biggest profits ever in 2024, according to LCH – for the second year in a row and on the back of rising stock markets.

Last year’s standout performers, with the best returns net of 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 overall fees.

Citadel cemented its position as the most profitable hedge fund ever in 2024, topping the rankings for the third year in a row, with DE Shaw and Millennium in second and third place respectively.

The top 20 managers in the $4.5 trillion hedge fund industry generated total profits for investors of $93.9 billion in 2024, up from the previous record of $67 billion in 2023, LCH said.

The top 20 companies collectively achieved asset-weighted returns of 13.1 percent, significantly outperforming the average hedge fund, which achieved 8.3 percent, according to other data from Hedge Fund Research.

LCH found that managers at the top 20 firms earned much lower overall fees, at just over a third of total gains, compared with 55.7 percent for the rest of the industry since inception.

Hedge funds have historically been known for their “two and 20” fee model, where investors pay a 2 percent management fee each year and a 20 percent performance fee on investment gains.

However, this has come under pressure since the global financial crisis, with investors complaining about performance and a lack of protection against market declines.

The increase in overall fees from 30 percent to about 50 percent of total gains is largely due to higher management fees, according to LCH.

While management fees gobbled up less than 10 percent of total gains in the late 1960s and 1970s, they accounted for nearly 30 percent in the past two decades, LCH said.

This shift suggests that efforts by institutional investors and investment advisors to reduce fees across the board have failed, with management fees capturing more of the returns as gains diminish.

The fastest-growing pillar of the hedge fund industry has been multi-manager platforms, which have generated higher average fees, according to prime brokers.

These companies have a “pass-through” expense model, where the manager passes all costs on to end investors rather than taking an annual management fee.

This can cover office rentals, technology, data, salaries, bonuses, and even entertainment for clients. It typically ranges from 3 to 10 percent of assets annually. A performance fee of 20 to 30 percent of profits is usually charged.

The LCH list calculates the most successful managers based on the cumulative dollar profits 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.

LCH as a fund will close this year, but Edmond de Rothschild will continue to invest in hedge funds through other funds within the group, Sofer said.

LCH, one of the world’s first funds of hedge funds, was founded in 1969. The value of one share, if purchased at the fund’s launch, has multiplied 172 times through December 31, 2024, representing a return of 9.8 percent annually.