Hedge funds have profited handsomely from fee income over the past 50 years or so, but they are now having to adopt new models more closely aligned with performance as pressure from institutional investors grows.
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The newly dynamic world of hedge fund fees
Hedge funds are under increasing pressure to justify their fees. Many are moving away from the old ‘two and twenty’ (or ‘2 and 20’) fee arrangement, composed of a 2% management fee and a standard performance or incentive fee of 20% of profits made by the fund above a certain predefined benchmark. Our survey of institutional investors for our 2025 annual repport on the State of the Hedge fund Industry highlighted the dissatisfaction. A third were unhappy with the fees they were charged.
That model has, however, proved very lucrative for hedge funds: investors have paid out almost half of their profits in fees since the early days of the industry more than half a century ago, according to research from LCH Investments, an investor in hedge funds, quoted by the Financial Times.1 Managers generated $3.7 trillion of gains before fees, but fees charged to investors were $1.8 trillion, or about 49% of gross gains, according to the LCH Investments analysis.
Now, growing numbers of institutional investors are demanding that hedge funds add a ‘hurdle’ rate, effectively asking the funds to deliver some outperformance before they start paying for it, as we pointed out in a previous article. That article highlighted a survey by BNP Paribas in December 2022 and January 2023, which showed that 66% of investors said that hurdle rates were their preferred fee structure. That compared with just 15% of investors a year earlier. BNP Paribas said the rise was likely due to ‘the rising interest rate environment and the fact that they have a cash plus return target for their portfolio’.2
In addition, a 2025 report by Goldman Sachs found that nearly half of investors in hedge funds want fund managers to forgo charging performance fees until returns exceed a preset threshold, but only 30% of managers currently offer that hurdle.3
The industry is making progress on aligning fees more closely with performance, as our survey of hedge fund investors for the same report established. Around 74% of the managers we interviewed for our annual report levy a management fee such as the 2-and-20 model, and 44% were considering changing their fee structure. Nearly two-thirds of those considering a change were doing so in order to gain a competitive advantage.
Why are you considering changing your fee structure ?
Moreover, considerable reductions in fees have already taken place, as we also outlined in the annual report. According to the fintech company Broadridge, for example, by 2023, hedge fund fees had fallen to levels not seen since the immediate aftermath of the 2008 financial crisis. Broadridge notes that the average hedge fund’s management fee now stands at 1.35%, while its performance fee is closer to 16.01%,4 as competition for assets intensifies and firms look for smarter ways to entice investors.
The results of the Broadridge survey were confirmed by a BNP Paribas survey of 238 hedge fund investors, which found that performance fees fell every year between 2014 and 2023 (except for 2020 and 2021, when the French bank did not record any data), as investors pulled money from the industry following often-lacklustre returns.5 There are some exceptions. Bloomberg, for example, notes that multi-strategy funds retain an ability to charge high fees.
Overall, a new era in hedge fund fees appears to be emerging – one that seeks to balance performance incentives with changes in operating models and a broadening view of investor benefits, according to With Intelligence.6 Many investors, for example, are demanding that fund managers not take a percentage of any investment gains unless they are better than the returns available on cash.
In September 2024, the Wall Street Journal reported that the latest and most prominent hedge fund manager to agree to such an arrangement, known in the industry as a ‘cash hurdle’, was ExodusPoint Capital Management, a firm founded by former Millennium Management executives Michael Gelband and Hyung Lee, which manages about $11 billion.
The newspaper added that fund investors – such as pension plans and university endowments – had started to press for fee models they say better align fund managers’ interests with theirs.
Overall, therefore, it does appear that hedge funds are reacting to pressure from institutional investors by realigning their fees with performance. As more and more hedge funds switch to new models, the pressure on the remaining funds that stick with the old model will only intensify.
Download our state of the hedge fund industry report
As part of our aim to be at the forefront of the hedge fund industry, IG Prime commissioned a survey into the attitudes of hedge funds and institutional investors to key issues facing the industry in 2024 and 2025. The results help inform our State of the Hedge Fund Industry 2025 report. The first of a forward-looking annual series, this year’s report seeks to explain why the industry may have reached a turning point, with returns and asset growth set to improve – possibly markedly – in the coming years. Click here to download the full report now.
Sources
1 https://www.ft.com/content/d66e183c-6d0d-455c-b605-82610a1a4562
2 https://www.spglobal.com/market-intelligence/en/news-insights/articles/2025/1/global-private-equity-fundraising-sinks-for-3rd-straight-year-87110906
3 https://www.wsj.com/livecoverage/jobs-report-stock-market-today-dow-nasdaq-sp500-02-07-2025/
4 https://www.broadridge.com/article/asset-management/hedge-funds-leveraging-innovative-technology-for-growth
5 https://www.ft.com/content/0e82ad86-5967-4034-ad9b-a00c4db8708f
6 https://www.withintelligence.com/insights/pricing-performance/
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