If you have decided to start a hedge fund, hopefully you have taken some
time to consider how you will be compensated for managing the fund and
making successful investments.
Following are some of the more common fee structures used by sponsors of
- Management fee: The management fee is commonly charged as a percentage
of assets under management, and is usually between 0.5% and 2%. First-time
hedge fund managers usually try to minimize or eliminate the management
fee in order to align their interests with those of the fund investors.
- Performance fee/carried interest: Hedge fund sponsors often receive a performance
fee that is calculated as a percentage of the fund’s profits or
gains. This fee can be calculated and paid quarterly or annually. If the
fund’s underlying investments are expected to pay significant dividends,
then the general partner of the fund may be paid a performance fee at
the same time that the dividends are paid. The amount of the performance
fee is usually at least 20%, and can be greater if no management fee (or
a low management fee) is charged. The performance fee is usually paid
as a “carried interest” in the fund, which permits the general
partner to pay capital gains tax rates on the carried interest, rather
than at ordinary income rates.
Note that the ability to charge a performance fee depends on the state
in which the general partner is located, if your hedge fund has less than
$150 million in assets under management. For funds smaller than this amount,
it may not be permissible to charge a performance fee to investors that
are not considered “qualified clients” under SEC standards.
There may be workarounds for this, depending on the state in which you
There are many important legal issues to be considered when forming a hedge
fund, including the fee structure. If you are ready to form your hedge
fund, contact Whitley LLP Attorneys at Law today. We can help you navigate
the complex legal issues involved and help your fund get off to a successful start.