Hedge-Fund Fees Eat Up Half of Clients’ Profits

Over the past two decades, fees have amounted to more than 50% of gross gains, LCH research finds

By Caitlin McCabe

Jan. 19, 2025 7:01 pm ET

Hedge-fund investors often gripe about high fees. A new report puts the problem in sharp relief.

Just over half of the industry’s total gross performance was eaten away by fees over the past two decades, according to LCH Investments. That compares to about 30% between 1969 and the early 2000s, said the company, which manages and advises on investments in hedge funds on behalf of investment firm Edmond de Rothschild and other investors. 

“This increase in the proportion of gross gains being paid away in fees is clearly not to the advantage of investors,” said Rick Sopher, chairman of LCH.

Viewed another way, hedge funds have earned $3.72 trillion since the late 1960s—and kept nearly $1.8 trillion of that in fees. 

The worsening ratio of fees to gains reflects how hedge-fund returns have moderated in recent years, while fees, especially fixed management charges, have crept higher. Many firms take a management fee of 2% of assets, plus a performance fee equating to 20% of fund profits. Some outfits, including behemoth “multimanager” firms such as Citadel, charge much more. 

LCH released the findings alongside its annual “Great Money Managers” ranking of hedge funds, based on the lifetime gains they have generated, in dollars, for clients. Some key findings:

l  New York-based D.E. Shaw was on top for 2024, making investors $11.1 billion after fees for the year.

l  Citadel remained the most profitable money manager since inception, earning clients $83 billion since 1990. In 2024, it returned $9 billion in net gains to clients.

l  London-based Marshall Wace made LCH’s list for the first time. It made $4.5 billion in net gains last year, and $29.5 billion since starting in 1997.

l  The top 20 managers, a group that also includes Millennium Management, Bridgewater Associates and Elliott Management, oversee about 20% of industry assets but are responsible for a higher share of gains. In 2024, LCH estimates that 32% of industrywide net gains were made by those top firms.

LCH compiles the report based on meetings with managers, audited and management reports, internal estimates and other confidential sources. The firm has invested in many of the funds on the list since 1969.

Industry fees have long been contentious. In an open letter last year, dozens of large investors in hedge funds demanded changes to how managers are paid.

On fees, LCH found: 

l  The top 20 managers have kept 34.3% of gross gains, less than the rest of the industry.

l  That reflects “higher gross returns, more stable capital bases and their tendency not to generate large drawdowns,” Sopher said.

l  The lower fee ratio is notable because many of the top 20 firms are multimanager firms. They typically charge investors the costs of running their funds, including items such as signing bonuses and technology, in a “pass-through” fee model.

Write to Caitlin McCabe at caitlin.mccabe@wsj.com

Appeared in the January 21, 2025, print edition as 'Hedge-Fund Fees Eat Up Half Of Clients’ Profits, Report Says'.