The Performance of Hedge Fund Performance Fees

Fisher College of Business Working Paper No. 2020-03-014

Charles A. Dice Working Paper No. 2020-14

61 Pages Posted: 19 Jun 2020 Last revised: 17 May 2023

See all articles by Itzhak Ben-David

Itzhak Ben-David

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

Justin Birru

Ohio State University (OSU) - Department of Finance

Andrea Rossi

University of Arizona - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 17, 2023

Abstract

Performance-based fees in asset management contribute to the growing cost of financial intermediation. But how well do these fees align the long-run outcomes of fund managers and investors? In a large 22-year sample of hedge funds, we find that 60% of the gains on which incentive fees are paid are eventually offset by losses. As a result, the effective incentive fee rate is 50% vis-a-vis the nominal 20% rate. Overall, hedge fund fees consume 64% of the gross returns on investors’ capital and are only weakly correlated with actual long-run performance in the cross-section of funds.

Keywords: Financial Intermediation, Compensation, Incentives, Performance, Hedge Funds, Asset Management

JEL Classification: D24, G11, G23, J33

Suggested Citation

Ben-David, Itzhak and Birru, Justin and Rossi, Andrea, The Performance of Hedge Fund Performance Fees (May 17, 2023). Fisher College of Business Working Paper No. 2020-03-014, Charles A. Dice Working Paper No. 2020-14, Available at SSRN: https://ssrn.com/abstract=3630723 or http://dx.doi.org/10.2139/ssrn.3630723

Itzhak Ben-David (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

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HOME PAGE: http://https://u.osu.edu/ben-david.1/

National Bureau of Economic Research (NBER) ( email )

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HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/

Justin Birru

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Andrea Rossi

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

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