Hidden Costs in Hedge Fund Performance Fee Payment Frequencies

Abstract

Hedge funds calculate and pay performance fees at different frequencies: daily, monthly, quarterly or annually. Using data from a public hedge fund database, we document considerable variation in hedge funds’ performance fee payment frequencies. Despite the higher costs associated with more frequent performance fee payments, funds with more frequent performance fee payments were not associated with lower management fees. Liquid and more volatile hedge fund categories also tend to have more frequent payment frequencies. To estimate hidden costs due to more frequent performance fee payment, we propose a simple linear model including the management fee, performance fee, and strategy volatility.

Keywords: Crystallization Frequency, Payment Practices, Performance Fees, Hedge Funds

JEL Classification: G11, G12, G13, G23