Ever wonder whether private equity or hedge funds are a better deal? So did the executives at alternatives investment consulting firm Cliffwater LLC. According to a recent white paper, the answer is: Neither. “We show that neither private equity nor hedge funds, two of the fastest growing alternative asset classes, have a clear fee advantage over the other,” the paper stated.
Cliffwater calculated the typical hedge fund cost a total fee of 3.53%, equal to 32% of expected gross profits when it weighed outcomes by their likelihood of occurrence. By comparison, the typical private equity fund has a somewhat higher total fee cost of 3.73%, but that equals only 25% of expected gross profits, the paper concluded.
Cliffwater also found when returns are negative, hedge funds have an advantage because their fees remain at the same percentage of asset market value, but private equity fees rise as a percentage of invested assets because they are based on a fixed percentage of committed capital. However, the paper ignored the potential that hedge fund investors may pay a performance fee despite negative returns due to the lack of so-called clawbacks typically available in private equity funds.