Hedge fund managers pocket nearly half of investment gains as fees

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Investors in hedge funds have paid out almost half of their profits in fees since the early days of the industry more than half a century ago, new data shows.

Managers generated $3.7tn of total gains before fees, but fees charged to investors were $1.8tn, or about 49 per cent of gross gains, according to the analysis by LCH Investments, an investor in hedge funds.

The figures, which date back to 1969, show how the scale of the fees raked in by managers has soared as the industry has matured.

“Up to the year 2000, the hedge fund fee take had been running at around a third of overall gains, but since then it has increased to a half,” said
Rick Sopher, chief executive of Edmond de Rothschild Capital Holdings and chair of LCH Investments. “As returns came down, fees went up.”

New research comes after the world’s 20 most successful hedge funds made their biggest profits on record in 2024, according to LCH — for the second consecutive year and against a backdrop of surging equity markets.

The standout performers last year, delivering 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 charges.

Citadel cemented its position as the most profitable hedge fund of all time in 2024, topping the rankings for the third consecutive year, with DE Shaw and Millennium in second and third place, respectively.

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

Together the top 20 generated asset-weighted returns of 13.1 per cent, significantly outperforming the average hedge fund, which made 8.3 per cent, according to other data from Hedge Fund Research.

The managers in the top 20 had a much lower overall fee take at just over a third of gross gains, compared with 55.7 per cent for the rest of the industry since inception, LCH found.

Hedge funds have historically been known for a “two and 20” fee model, where investors pay 2 per cent in management fees every year and a 20 per cent performance fee on investment gains.

However, this has come under pressure since the global financial crisis, as investors have complained about performance and a lack of protection against market falls.

The increase in the overall fee take from 30 per cent to about 50 per cent of gross gains is largely due to higher management fees, according to LCH.

Whereas management fees used to eat up less than 10 per cent of gross gains in the late 1960s and 1970s, they have represented almost 30 per cent in the past two decades, LCH said. 

The shift suggests efforts by institutional investors and investment consultants to cut fees across the board have failed, with management fees gobbling up more of the returns as gains have dwindled.

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

Such firms have a “pass-through” expenses model, where the manager passes on all costs to their end investors instead of taking an annual management fee.

That can cover office rents, technology and data, salaries, bonuses and even client entertainment. It typically varies from 3 to 10 per cent of assets annually. A performance fee of 20-30 per cent of profits is usually charged on top. 

LCH’s list calculates which managers are most successful based on the cumulative dollar profits they have made 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.

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

LCH, one of the world’s first funds of hedge funds, was founded in 1969. The value of one share, if bought at the fund’s launch, has multiplied by 172 times to December 31 2024, representing a return of 9.8 per cent a year.