Hedge fund investors have lost over half their gains to fees, finds study

Hedge fund clients have seen over half of their gross profits eroded by fees in the past 20 years, according to new research from LCH Investments.

The new study from the firm, which advises on hedge fund investments for Edmond de Rothschild and other clients, revealed that fees now claim a much larger share of gains compared to previous decades.

As reported by the Wall Street Journal, LCH Investments found between 1969 and the early 2000s, hedge fund fees represented roughly 30 percent of gross profits. Since then, the proportion has risen to over 50 percent.

“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.

The report adds to the every-growing body of work questioning the balance of returns and costs across the industry. Hedge funds generally charge a 2 percent annual management fee on assets, along with performance fees of about 20 percent of profits. The so-called 2-and-20 model of compensation, drew ire from a coalition of institutional investors last May, led by the Teacher Retirement System of Texas, who blasted what they called "skill-less returns" from hedge funds.

Some large players – particularly multimanager firms such as Citadel – charge higher rates, leading to tougher questions on value and risks.

LCH estimates that since 1969, hedge funds have generated $3.72 trillion in gross gains while pocketing nearly $1.8 trillion in fees. The firm released the findings as part of its annual “Great Money Managers” report, which ranks hedge funds based on lifetime profits generated for clients.

D.E. Shaw topped the list for 2024, producing $11.1 billion in net gains after fees last year. Citadel, which retained its title as the most profitable hedge fund since its inception, has delivered $83 billion in net lifetime gains for clients, including $9 billion in 2024 alone.

Reinforcing the importance of manager selection, the top hedge fund managers – who oversee about 20 percent of total industry assets – accounted for 32 percent of net gains in 2024. Despite charging higher fixed and pass-through fees, those 20 firms kept a smaller share of gross profits (34.3 percent) compared to the broader industry.

Sopher attributed this to their stronger returns, steadier capital, and lower drawdowns. “Higher gross returns, more stable capital bases and their tendency not to generate large drawdowns” were key factors, he said.

But more broadly, the steep price of admission for hedge funds – including high minimums, lofty fees, and limited liquidity – have made them a non-buy for a large cohort of advisors and the ultra-high-net-worth advisors they work with.