Hedge Fund Fees

As of 2006, hedge fund assets stood at $1.8 trillion. While previous research shows that hedge fund incentive and management fees can consume over 40% of funds‘ assets, the literature is scant on the relationship between fee levels and other fund characteristics. In this paper, we use a unique body of nine hedge fund data sets spanning the period 1998– 2006 to examine cross-sectional fee level variation and its effect on fund performance and flows. We find that hedge funds‘ management fee levels and incentive fee levels are related to fund characteristics that change agency and overhead costs, but are also unrelated to net of fee alpha performance. Funds of funds‘ fee structures, however, conflict with many of the hedge funds‘ results and also display a negative relationship between incentive fee levels and performance. Redemption fee use is not correlated with other fee levels or portfolio liquidity, but is associated with poor performance and higher flows. Overall, our results have important implications for investors and the investment industry, especially with regards to pricing and performance.