How do hedge fund managers get paid?
Beginners · Video 3 of 12 · 0:54 ·
Usually two ways: a yearly management fee on the fund, and a performance fee, a share of the profits. In one example, a $1,000,000 fund earns 20%, or $200,000. A 1.5% management fee is $15,000 and a 20% performance fee on the remaining profit is $37,000, so investors keep $148,000, a 14.8% return. In a losing year there's no performance fee, and a high-water mark stops investors paying twice for the same gains.
Everything here is for educational purposes only and is not legal, tax or investment advice, or an offer to buy or sell any security. Laws and thresholds change and depend on your facts, so talk to a qualified attorney before acting.
Key facts
- The management fee is a percentage of the fund, charged every year.
- The performance fee is a share of the profit, often 20%, taken after the management fee.
- Example: $1,000,000 earning 20% leaves investors $148,000 (14.8%) after a 1.5% fee and a 20% performance fee.
- In a losing year, there is no performance fee.
- A high-water mark means performance fees are only paid on new gains.
- The terms are set in the fund's documents.
Transcript
Operator: A 20% year. Investors made $148,000. The manager made $52,000. Here's how that split works.
Founder: Wait. The manager gets a quarter?
Operator: It's all set in the fund documents. Follow a million dollars.
Operator: It earns 20%. That's $200,000.
Operator: First, a management fee. Here, 1.5% of the fund: $15,000. It pays for running the fund.
Founder: Even in a bad year?
Operator: Even then. That's why investors watch that number closely.
Operator: Then the performance fee: 20% of the profit that's left. That's $37,000.
Operator: Investors keep $148,000. A 14.8% return.
Founder: And if the fund loses money?
Operator: Then no performance fee at all. The big payday only comes when investors make money.
Founder: So we win together.
Operator: That's the point. And a high-water mark means they never pay twice for the same gains.
Founder: So in a 20% year...