Performance fees: As old as portfolio management itself?
Jan 20th, 2009 | Filed under: Investment Management Fees, Today's Post
With 2008 hedge fund performance figures coming in at around -15% to -25%, the inevitable question of hedge fund fees has bubbled back up to the surface. It often seems that the underlying issue driving the backlash against hedge fund fees isn’t that they are a drag on returns or even that they aren’t commensurate with the value creation anticipated by the investors who agree to pay them. Instead, it seems the backlash against hedge fund fees is often driven by the sheer size of the largest compensation packages of the most successful managers.
For many, the prototypical “2 and 20″ fee structure seems greedy. And for many, hedge funds exemplify greed. Therefore, hedge funds must have invented “2 and 20″ in the first place. For example, this recent article by Dow Jones’ David Walker says:
“Hedge funds’ poor performance last year was bad enough to bring into question the fee structure that has been in place since Alfred Jones pioneered the investment vehicles soon after World War II. He charged investors 2% of assets and 20% of any gains.”
In fact, Jones did not actually charge a management fee at all. He only charged a 20% performance fee. And he didn’t even cook up the idea himself. According to Fortune Magazine’s Carol Loomis, author of a seminal 1966 article on Jones, the king of value investing himself used the same fee structure. Wrote Loomis:
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