Fund expenses are the "dirty little secret" of the hedge fund industry.
Sources say the practice of charging expenses back to the fund can add 8% or more per year to investor costs, on top of the typical hedge fund pricing of a 2% management fee and a 20% performance fee. The variable and uncapped expenses can cover anything — from audits, legal services, salaries, bonuses and technology upgrades to less orthodox purchases such as office gyms and Jacuzzis, company aircraft and even fine art.
The practice of charging fund expenses is fairly widespread, but it seems impossible to identify average industrywide expenses or those per fund because of hedge fund managers' reluctance to provide information.
"This is the hedge fund industry's dirty little secret," said the chief executive of an institutional hedge fund-of-funds, who requested anonymity. "Fund expenses are not advertised, they don't show up on a spreadsheet, and you often just see a blended number that has all the expenses buried in it, completely unidentifiable. We've seen hedge fund managers try to cram everything you can possibly imagine into this number."
The CEO said his fund invests in a limited number of multistrategy funds that are very conservative — and very open — about what fees they charge back to investors.
One hedge fund consultant, who asked for anonymity, maintained that "certain funds can charge whatever they want. Because performance is so good, they can get away with it. … In general, you can't get away with charging outrageous fees to institutional investors, at least to those with sophisticated in-house staff or a consultant whose job it is to watch these things."