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Hedge fund fees?

Hedge fund fees are cheap. It all comes down to demand versus supply. There is probably at least $30 trillion of global private and institutional money that would like a return higher than bonds with effective capital preservation. Yet just $1 trillion is in hedge funds and that is with a lot of double counting and AUM exaggeration - the actual sum is significantly less.

With this demand inbalance, if anything, fees are more likely to ratchet up for good hedge funds. Skill, by definition, must be rare and these managers will always command premium fees. Investors allocate to hedge funds so they can sleep well at night knowing risk is being managed and a reliable return is being generated by a highly experienced manager.

The fairest fees charged were by hedge fund pioneers like Warren Buffett and AW Jones - zero management fees and 20-25% for performance. This best aligns the manager interests with the investors. In percentage terms, lower returns mean lower fees anyway. 20% of 10% is less than 20% of 20%. Investors thus benefit from paying as high INCENTIVE fees as possible.

Unlike traditional funds, even a single negative year for a hedge fund is franchise endangering. The pressure to perform is much higher. For a TRUE alpha producer, the fees remain a bargain.

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