Client Profits Are Wiped Out by Hedge Fund Fees

MHedge-fund fees have long been a source of frustration for investors, and a recent report from LCH Investments highlights just how significant the issue has become. Over the past two decades, more than half of the hedge-fund industry’s total gross performance has been consumed by fees.

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This marks a sharp increase compared to the period between 1969 and the early 2000s, when fees accounted for about 30% of gross gains. LCH Investments, which manages and advises on hedge fund investments for Edmond de Rothschild and other clients, presented these findings in its latest analysis.

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“This increase in the proportion of gross gains being paid away in fees is clearly not to the advantage of investors,” noted Rick Sopher, chairman of LCH.

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Since the late 1960s, hedge funds have generated $3.72 trillion in gross gains but retained nearly $1.8 trillion in fees. This escalating fee-to-gain ratio reflects a combination of moderating hedge-fund returns and steadily increasing management charges.

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Most hedge funds still follow the standard model of charging a 2% management fee on assets and a 20% performance fee on profits, although some major players, such as Citadel, impose even higher fees.

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LCH released these findings alongside its annual “Great Money Managers” ranking, which evaluates hedge funds based on the lifetime net gains they have delivered for clients. Highlights from the 2024 report include:

• D.E. Shaw, based in New York, led for 2024, delivering $11.1 billion in net gains to investors after fees.
• Citadel retained its title as the most profitable hedge fund since its inception, generating $83 billion in net gains for clients since 1990. For 2024 alone, it returned $9 billion in net gains.
• Marshall Wace, headquartered in London, made the list for the first time, achieving $4.5 billion in net gains last year and $29.5 billion since its founding in 1997.
• The top 20 hedge funds, including major players like Millennium Management, Bridgewater Associates, and Elliott Management, control about 20% of the industry’s assets yet account for a disproportionately large share of gains. In 2024, these firms were responsible for 32% of all net industry gains.

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LCH’s findings are based on meetings with hedge fund managers, audited financial statements, management reports, internal estimates, and other confidential sources. The firm, which has invested in many of these funds since 1969, emphasized that the top-performing managers tend to outperform not just in gross gains but also in fee efficiency.

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Despite their impressive performance, hedge-fund fees remain a point of contention.

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Last year, several major hedge fund investors issued an open letter calling for reforms to the fee structure. The LCH report shed light on the fee dynamics within the industry:

• The top 20 hedge fund managers retained 34.3% of gross gains, a smaller share compared to the rest of the industry.
• According to Sopher, this is due to their “higher gross returns, more stable capital bases, and their tendency not to generate large drawdowns.”
• The lower fee ratio is particularly notable because many of these top firms use a "pass-through" fee model, which includes operational costs such as signing bonuses and technology expenses.

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The dominance of the top hedge-fund managers underscores their ability to deliver value despite higher fees, but it also highlights the challenges faced by smaller firms and investors seeking equitable returns. With $1.8 trillion of industry gains absorbed by fees over decades, the call for reform and greater transparency remains as urgent as ever.

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