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Hedge Fund Monthly
The Fee Element in Funds of Funds – A Closer Look
Rajeev Baddepudi, Hedge Fund Analyst
June 2006

With information on close to 2,000 global funds of funds now in our database, we decided to take a closer look at the fees charged by these funds. And sure enough, the analysis tossed up some interesting findings, presented here in this write-up.

The performance and management fees for the 1,105 funds surveyed averaged 8.7% and 1.3% respectively. Looking at the distribution of these funds by performance fees charged (Figure 1), one sees that a fee of 10% is the norm (accounting for almost half of the funds), and that it is skewed towards the lower end of the fee spectrum (accounting for another one-third of the funds).

Figure 1: Distribution of Funds of Funds by Performance Fees Charged
Click on the image for an enlarged preview

Source: Eurekahedge

Contrast this with the global single-manager hedge fund industry, where over 80% of the funds charge a performance fee of 20% and only a mere 1% charge none. But funds of funds seem to be catching up with their hedge fund peers in this particular respect, as the graph below (Figure 2) shows. The graph depicts a further age-wise and fees-wise taxonomy of the funds of funds surveyed, plotting average fees of funds of varying ages, with the number of funds in each fee-bucket for weights. The graph reveals that newer funds tend to charge higher performance fees, but lower management fees, than older funds. 

Figure 2: Average Fees Charged by Age of the Fund
Click on the image for an enlarged preview

Source: Eurekahedge

But do funds charging a high performance fee necessarily charge high management fees too? The next graph ( Figure 3) shows that while this is true of the funds that do have a performance fee clause, those charging zero performance fees have a particularly high management fee average – nearly the same as that of a 20%-performance-fee fund.

Figure 3: Performance Fee vs Management Fee
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Source: Eurekahedge

And lastly, does the fee charged by these funds have any bearing on their performance? Are the returns generated in step with the fees charged? The following graph aims to show just that, as it plots average annualised returns by performance fee charged.

 Figure 4: Average Performance by Fee Charged
Click on the image for an enlarged preview

Source: Eurekahedge

While the extremes in the graph (funds with 0% and 20% performance fee) don’t spring any surprises (higher fee translates to higher returns), it is those in the mid range (funds with 5%, 10% and 15% fees) that show barely any difference in the returns generated. Furthermore, these funds actually reveal an inverse relationship between fees charged and returns generated, negligible difference in returns notwithstanding.

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