Actual vs. Nominal Hedge Fund Performance Fees

Is the nominal incentive fee charge by hedge funds (typically 20% of profits exceeding a previous high-water mark) representative of the actual aggregate incentive fee paid by fund investors? In the July 2020 revision of their paper entitled “The Performance of Hedge Fund Performance Fees”, Itzhak Ben-David, Justin Birru and Andrea Rossi (1) quantify the actual aggregate incentive fee paid by investors across a large sample of hedge funds over a 22-year sample period and (2) explore reasons for the difference between actual aggregate and nominal fees. Using return and management/performance fee data for 5,917 live and dead hedge funds during 1995 through 2016, they find that: (more…)