Editing Hedge fund (section)

==Fees and remuneration==
===Fees paid to hedge funds===
Hedge fund management firms typically charge their funds both a [[management fee]] and a [[performance fee]].

Management fees are calculated as a percentage of the fund's [[net asset value]] and typically range from 1% to 4% per annum, with 2% being standard.<ref>{{cite news |url=http://www.ft.com/cms/s/0/cf7f91e2-f3f0-11dd-9c4b-0000779fd2ac.html |title=Hedge fund investors have a great chance to cut fees |work=[[Financial Times]] |date=6 February 2009 |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20110520075056/http://www.ft.com/cms/s/0/cf7f91e2-f3f0-11dd-9c4b-0000779fd2ac.html |archive-date=20 May 2011 |url-status=live |df=dmy-all }}</ref><ref>{{cite news |last=Hulbert |first=Mark |url=https://www.nytimes.com/2007/03/04/business/yourmoney/04stra.html |title=2 + 20, And Other Hedge Math |work=[[The New York Times]] |date=4 March 2007 |access-date=26 November 2011 |archive-url=https://web.archive.org/web/20111209204544/http://www.nytimes.com/2007/03/04/business/yourmoney/04stra.html |archive-date=9 December 2011 |url-status=live |df=dmy-all }}</ref><ref>{{cite magazine |url=http://www.businessweek.com/magazine/content/07_20/b4034053.htm |title=Hedge Fund Fees: The Pressure Builds |magazine=Businessweek |date=4 March 2007 |access-date=26 November 2011 |archive-url=https://web.archive.org/web/20110815142741/http://www.businessweek.com/magazine/content/07_20/b4034053.htm |archive-date=15 August 2011 |url-status=dead |df=dmy-all }}</ref> They are usually expressed as an annual percentage, but calculated and paid monthly or quarterly. Management fees for hedge funds are designed to cover the operating costs of the manager, whereas the performance fee provides the manager's profits. However, due to [[economies of scale]] the management fee from larger funds can generate a significant part of a manager's profits, and as a result some fees have been criticized by some public pension funds, such as [[CalPERS]], for being too high.<ref>Imogen Rose-Smith, [https://www.institutionalinvestor.com/article/2bsytmbx8uech0rm5e5fk/corner-office/public-pension-plans-bet-their-future-on-hedge-funds "Public Pension Plans Bet Their Future On Hedge Funds"] {{Webarchive|url=https://web.archive.org/web/20231110223809/https://www.institutionalinvestor.com/article/2bsytmbx8uech0rm5e5fk/corner-office/public-pension-plans-bet-their-future-on-hedge-funds |date=10 November 2023 }}, ''Institutional Investor'', 20 June 2011.</ref>

The [[performance fee]] is typically 20% of the fund's profits during any year, though performance fees range between 10% and 50%. Performance fees are intended to provide an incentive for a manager to generate profits.<ref>{{cite web |url=http://www.eipny.com/pdf/HedgeFundMathWhyFeesMatter110907.pdf |title=Hedge Fund Math: Why Fees Matter |publisher=Epoch Investment Partners Inc. |date=November 9, 2007 |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20110710173416/http://www.eipny.com/pdf/HedgeFundMathWhyFeesMatter110907.pdf |archive-date=10 July 2011 |url-status=dead |df=dmy-all }}</ref><ref>{{cite magazine |url=https://www.forbes.com/lists/2006/54/biz_06rich400_Steven-A-Cohen_PZMO.html |title=The 400 Richest Americans: Stephen A. Cohen |magazine=Forbes.com |date=19 September 2006 |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20100923022118/http://www.forbes.com/lists/2006/54/biz_06rich400_Steven-A-Cohen_PZMO.html |archive-date=23 September 2010 |url-status=dead |df=dmy-all }}</ref> Performance fees have been criticized by [[Warren Buffett]], who believes that because hedge funds share only the profits and not the losses, such fees create an incentive for high-risk investment management. Performance fee rates have fallen since the start of the [[credit crunch]].<ref>{{cite web|url=http://www.opalesque.com/IndustryUpdates/691/HFR_Hedge_fund_liquidations_fall_to_levels217.html|title=HFR: Hedge fund liquidations fall to pre-crisis levels as launches increase in Q4-09, average incentive fees decline |date=10 March 2010|publisher=Opalesque|access-date=10 March 2010|archive-url=https://web.archive.org/web/20111004164418/http://www.opalesque.com/IndustryUpdates/691/HFR_Hedge_fund_liquidations_fall_to_levels217.html|archive-date=4 October 2011|url-status=live|df=dmy-all}}</ref>

Almost all hedge fund performance fees include a "[[high water mark]]" (or "loss carryforward provision"), which means that the performance fee only applies to net profits (''i.e.'', profits after losses in previous years have been recovered). This prevents managers from receiving fees for volatile performance, though a manager will sometimes close a fund that has suffered serious losses and start a new fund, rather than attempt to recover the losses over a number of years without a performance fee.<ref>{{cite magazine |url=http://www.businessweek.com/bwdaily/dnflash/aug2005/nf2005088_1711_db042.htm |title=Hedge Funds: Fees Down? Close Shop |magazine=Businessweek |date=8 August 2005 |first1=Amey |last1=Stone   |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20100118204507/http://www.businessweek.com/bwdaily/dnflash/aug2005/nf2005088_1711_db042.htm |archive-date=18 January 2010 |url-status=dead |df=dmy-all }}</ref>

Some performance fees include a "[[hurdle]]", so that a fee is only paid on the fund's performance in excess of a [[benchmark price|benchmark]] rate (''e.g.'', [[LIBOR]]) or a fixed percentage.<ref name="Roadmap">{{cite web |url=http://www.aima.org/download.cfm/docid/6133E854-63FF-46FC-95347B445AE4ECFC |title=AIMA Roadmap to Hedge Funds |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20100915101041/http://aima.org/download.cfm/docid/6133E854-63FF-46FC-95347B445AE4ECFC |archive-date=15 September 2010 |url-status=dead |df=dmy-all }}</ref> The hurdle is usually tied to a benchmark rate such as Libor or the one-year Treasury bill rate plus a spread.<ref name="HedgeFund Database">{{Cite web|url=http://www.hedgeco.net/hedgeducation/hedge-fund-glossary/hurdle-rate.php|title=HedgeFund Database|access-date=29 October 2019|archive-date=29 October 2019|archive-url=https://web.archive.org/web/20191029100208/http://www.hedgeco.net/hedgeducation/hedge-fund-glossary/hurdle-rate.php|url-status=dead}}</ref> A "soft" hurdle means the performance fee is calculated on all the fund's returns if the hurdle rate is cleared. A "hard" hurdle is calculated only on returns above the hurdle rate.<ref>Cathleen M. Rittereiser, Lawrence E. Kochard, [https://books.google.com/books?id=VXwKDSqr8UwC&dq=hedge+fund+fee+hard+hurdle&pg=PA110 A "Top Hedge Fund Investors: Stories, Strategies, and Advice"] {{Webarchive|url=https://web.archive.org/web/20160810014550/https://books.google.com/books?id=VXwKDSqr8UwC&pg=PA110&lpg=PA110&dq=hedge+fund+fee+hard+hurdle&source=bl&ots=44-wFvHigv&sig=oT-vDViKoerKzaLGCbcb6mgTZd4&hl=en&sa=X&ei=Ci_3T4XcIqq80QGjqaT6Bg&ved=0CJMEEOgBMAk#v=onepage&q=hedge%20fund%20fee%20hard%20hurdle&f=false |date=10 August 2016 }}, John Wiley & Sons, 20 July 2010 p. 110</ref> By example the manager sets a hurdle rate equal to 5%, and the fund return 15%, incentive fees would only apply to the 10% above the hurdle rate.<ref name="HedgeFund Database"/> A hurdle is intended to ensure that a manager is only rewarded if the fund generates returns in excess of the returns that the investor would have received if they had invested their money elsewhere.

Some hedge funds charge a redemption fee (or withdrawal fee) for early withdrawals during a specified period of time (typically a year), or when withdrawals exceed a predetermined percentage of the original investment.<ref>{{cite web |url=http://www.hedgeworld.com/education/index.cgi?page=hedge_fund_basics |title=Hedge Funds |publisher=HedgeWorld |access-date=26 November 2011 |archive-url=https://web.archive.org/web/20111021084359/http://hedgeworld.com/education/index.cgi?page=hedge_fund_basics |archive-date=21 October 2011 |url-status=dead |df=dmy-all }}</ref> The purpose of the fee is to discourage short-term investing, reduce turnover, and deter withdrawals after periods of poor performance. Unlike management fees and performance fees, redemption fees are usually kept by the fund and redistributed to all investors.

===Remuneration of portfolio managers===
Hedge fund management firms are often owned by their [[portfolio manager]]s, who are therefore entitled to any profits that the business makes. As management fees are intended to cover the firm's operating costs, performance fees (and any excess management fees) are generally distributed to the firm's owners as profits. Funds do not tend to report compensation, and so published lists of the amounts earned by top managers tend to be estimates based on factors such as the fees charged by their funds and the capital they are thought to have invested in them.<ref name=Goldstein>{{cite news |title=Paulson, at $4.9 billion, tops hedge fund earner list |first=Matthew |last=Goldstein |url=https://www.reuters.com/article/us-hedgefunds-richlist-idUSTRE7304N320110401 |work=Reuters |date=1 April 2011 |access-date=26 July 2012 |archive-url=https://web.archive.org/web/20121019020419/http://www.reuters.com/article/2011/04/01/us-hedgefunds-richlist-idUSTRE7304N320110401 |archive-date=19 October 2012 |url-status=live |df=dmy-all }}</ref> Many managers have accumulated large stakes in their own funds and so top hedge fund managers can earn extraordinary amounts of money, perhaps up to $4 billion in a good year.<ref name=Schwartz>{{cite news |title=Pay of Hedge Fund Managers Roared Back Last Year |first=Nelson D. |last=Schwartz |url=https://www.nytimes.com/2010/04/01/business/01hedge.html |newspaper=New York Times |date=31 March 2010 |access-date=8 August 2012 |archive-url=https://web.archive.org/web/20120630095938/http://www.nytimes.com/2010/04/01/business/01hedge.html |archive-date=30 June 2012 |url-status=live |df=dmy-all }}</ref><ref>{{cite book |title=Chasing Alpha |last=Augar |first=Philip |year=2009 |publisher=Bodley Head |location=London |isbn=978-1-84792-036-2 |page=65}}</ref>

Earnings at the very top are higher than in any other sector of the financial industry,<ref name=bbchedge>{{cite news |url=https://www.bbc.co.uk/news/business-11942117 |title=Masters of the universe: meet the world's best-paid men |first=Richard |last=Anderson |date=2 February 2011 |publisher=BBC |access-date=28 July 2012 |archive-url=https://web.archive.org/web/20121110111757/http://www.bbc.co.uk/news/business-11942117 |archive-date=10 November 2012 |url-status=live |df=dmy-all }}</ref> and collectively the top 25 hedge fund managers regularly earn more than all 500 of the chief executives in the [[S&P 500]].<ref>{{cite journal |ssrn=2134208 |title=Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts and Challenges |author=Kaplan, Steven N. |date=22 August 2012 |journal=Chicago Booth Research Paper No. 12-42; Fama-Miller Working Paper |publisher=Social Science Research Network }}</ref> Most hedge fund managers are remunerated much less, however, and if performance fees are not earned then small managers at least are unlikely to be paid significant amounts.<ref name=bbchedge/>

In 2011, the top manager earned $3 billion, the tenth earned $210 million, and the 30th earned $80 million.<ref>{{cite news|last=Vardi|first=Nathan|date=3 January 2012|title=The 40 Highest-Earning Hedge Fund Managers|work=Forbes|url=https://www.forbes.com/sites/nathanvardi/2012/03/01/the-40-highest-earning-hedge-fund-managers-3/|url-status=live|access-date=12 July 2021|archive-url=https://web.archive.org/web/20120723220442/http://www.forbes.com/lists/2012/hedge-fund-managers-12_land.html|archive-date=23 July 2012|df=dmy-all}}</ref> In 2011, the average earnings for the 25 highest-compensated hedge fund managers in the United States was $576 million<ref name=Westbrook>{{cite news |title=Pay For Top-Earning U.S. Hedge Fund Managers Falls 35%, AR Says |first=Jesse |last=Westbrook |url=https://www.bloomberg.com/news/2012-03-30/pay-for-top-earning-u-s-hedge-fund-managers-falls-35-ar-says.html |work=Bloomberg |date=30 March 2012 |access-date=8 August 2012 |archive-url=https://web.archive.org/web/20120615130222/http://www.bloomberg.com/news/2012-03-30/pay-for-top-earning-u-s-hedge-fund-managers-falls-35-ar-says.html |archive-date=15 June 2012 |url-status=live |df=dmy-all }}</ref> while the mean total compensation for all hedge fund investment professionals was $690,786 and the median was $312,329. The same figures for hedge fund CEOs were $1,037,151 and $600,000, and for chief investment officers were $1,039,974 and $300,000, respectively.<ref name=Tunick>{{cite news |title=Compensation Survey:Banking on the Back Office |first=Britt Erica |last=Tunick |url=http://www.absolutereturn-alpha.com/Article/3036783/Compensation-Survey-Banking-on-the-Back-Office.html |archive-url=https://archive.today/20130116044009/http://www.absolutereturn-alpha.com/Article/3036783/Compensation-Survey-Banking-on-the-Back-Office.html |url-status=dead |archive-date=16 January 2013 |magazine=Absolute Return + Alpha |date=1 June 2012 |access-date=8 August 2012 }}</ref>

Of the 1,226 people on the ''Forbes'' World's Billionaires List for 2012,<ref>{{cite magazine |url=https://www.forbes.com/billionaires/list/ |title=The World's Billionaires |date=March 2012 |magazine=Forbes |access-date=9 August 2012 |archive-url=https://web.archive.org/web/20110802223425/http://www.forbes.com/wealth/billionaires/list |archive-date=2 August 2011 |url-status=live |df=dmy-all }}</ref> 36 of the financiers listed "derived significant chunks" of their wealth from hedge fund management.<ref>{{cite news |url=https://www.forbes.com/sites/edwindurgy/2012/03/09/billionaire-hedge-fund-managers/ |title=Billionaire Hedge Fund Managers |first=Edwin |last=Durgy |date=9 March 2012 |work=Forbes |access-date=9 August 2012 |archive-url=https://web.archive.org/web/20120728122211/http://www.forbes.com/sites/edwindurgy/2012/03/09/billionaire-hedge-fund-managers/ |archive-date=28 July 2012 |url-status=live |df=dmy-all }}</ref> Among the richest 1,000 people in the United Kingdom, 54 were hedge fund managers, according to the ''Sunday Times'' Rich List for 2012.<ref>{{cite web |url=http://hereisthecity.com/2012/04/27/alan-howard-tops-hedge-fund-rich-list-with-personal-fortune-of-1/ |archive-url=https://archive.today/20130126192208/http://hereisthecity.com/2012/04/27/alan-howard-tops-hedge-fund-rich-list-with-personal-fortune-of-1/ |url-status=dead |archive-date=2013-01-26 |title=Sunday Times Hedge Fund Rich List 2012 |date=April 2012 |work=HITC Business |publisher=Here Is The City |access-date=12 July 2012 }}</ref>

A portfolio manager risks losing his past compensation if he or she engages in [[insider trading]]. In ''[[Chip Skowron|Morgan Stanley v. Skowron]]'', 989 F. Supp. 2d 356 (S.D.N.Y. 2013), applying New York's [[faithless servant]] doctrine, the court held that a hedge fund's portfolio manager engaging in insider trading in violation of his company's code of conduct, which also required him to report his misconduct, must repay his employer the full $31 million his employer paid him as compensation during his period of faithlessness.<ref name="auto6">{{Cite book|url=https://books.google.com/books?id=3RaGDwAAQBAJ&q=%22faithless+servant%22&pg=PA472|title=Employment Law: Private Ordering and Its Limitations|first1=Timothy P.|last1=Glynn|first2=Rachel S.|last2=Arnow-Richman|first3=Charles A.|last3=Sullivan|date= 2019|publisher=Wolters Kluwer Law & Business|isbn=978-1-5438-0106-4|via=Google Books}}</ref><ref name="auto4">{{cite web|url=https://www.ibtimes.co.uk/faithless-ex-morgan-stanley-fund-manager-ordered-repay-31m-former-employer-1429819|first=Jerin|last=Matthew|title='Faithless' Ex-Morgan Stanley Fund Manager Ordered to Repay $31m to Former Employer|date=December 20, 2013|website=International Business Times UK|access-date=7 August 2019|archive-date=12 July 2023|archive-url=https://web.archive.org/web/20230712231643/https://www.ibtimes.co.uk/faithless-ex-morgan-stanley-fund-manager-ordered-repay-31m-former-employer-1429819|url-status=live}}</ref><ref>{{cite web|url=https://dealbook.nytimes.com/2013/12/23/the-huge-costs-of-being-a-faithless-servant/|title=The Huge Costs of Being a 'Faithless Servant'|first=Peter J.|last=Henning|date=December 23, 2013|website=New York Times DealBook|access-date=7 August 2019|archive-date=23 December 2013|archive-url=https://web.archive.org/web/20131223170550/https://dealbook.nytimes.com/2013/12/23/the-huge-costs-of-being-a-faithless-servant/|url-status=live}}</ref><ref>{{cite web|url=https://www.greenwichtime.com/news/article/Morgan-Stanley-seeks-10-2-million-from-convicted-4193127.php|title=Morgan Stanley seeks $10.2 million from convicted former trader|date=January 15, 2013|work=GreenwichTime|access-date=7 August 2019|archive-date=27 June 2019|archive-url=https://web.archive.org/web/20190627172218/https://www.greenwichtime.com/news/article/Morgan-Stanley-seeks-10-2-million-from-convicted-4193127.php|url-status=dead}}</ref> The court called the insider trading the "ultimate abuse of a portfolio manager's position".<ref name="auto4"/> The judge also wrote: "In addition to exposing Morgan Stanley to government investigations and direct financial losses, Skowron's behavior damaged the firm's reputation, a valuable corporate asset."<ref name="auto4"/>