The Dynamics of Hedge Fund Fees
Indian School of Business
Zhi Jay Wang
University of Oregon - Charles H. Lundquist School of Business
University of Oregon
Quoc H. Nguyen
University of Illinois at Urbana-Champaign
March 15, 2103
In contrast to the perception of a common 2/20 fee structure, we find considerable cross-sectional and time series variations in hedge fund fees using a large panel data set. Fund family characteristics and prior performance play an important role in fee determination. New fund families are likely to charge at- or above-median fees. Initial fees of funds introduced by an existing family are positively related to the prior performance of the family as well as of the investment strategy they follow. Furthermore, management fees are dynamically adjusted in response to past fund performance. Funds that increase management fee more aggressively experience a bigger drop in subsequent money inflows, and are more likely to maintain their good performance. This suggests that fee increases, which typically apply only to new investors, may benefit existing investors by mitigating diseconomies of scale.
Number of Pages in PDF File: 42
Keywords: Hedge Funds, Fees, Incentives
JEL Classification: G23, G29
Date posted: August 17, 2010 ; Last revised: November 14, 2013
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