Investment fund fee structures
Fund managers invest the money of their clients with the expectation of generating premium returns. For this work, they charge a fee. But what does this fee structure look like?
When you decide to invest your money into the financial markets you can do this actively by trading a market such as a forex market, semi-passively by investing in stocks and ETFs yourself, or passively by investing in an investment fund.
An investment fund is a team of managers who invest the money of participants in the markets through their own unique strategies. Investment funds are mostly aimed at institutions and high-net-worth individuals. These funds come in all shapes and sizes and cover every asset class in existence. This allows investors to diversify their investment portfolio and have a completely hands-off approach. This obviously comes with a price.
Investment funds can charge their participants 4 types of fees:
-Entrance fee. A one-time fee to onboard the participant often ranges from 0%-1% of the investment. It’s used to cover administrative expenses.
-Management fee. A fixed annual fee is charged monthly or annually to cover the operational costs of the fund. This can range from 0%-5% annually.
-Performance fee. A share of the profits generated within the fund is paid out to the investment managers. This can range from 0%-50% of profits generated.
-Exit fee. A one-time fee when a participant leaves the fund often ranges from 0%-2% of the investment.
Most investment funds charge a combination of these fees to their participants but rarely charge all of them. The returns reported by funds are net returns, meaning after all fees are charged. In order to stay competitive as an investment fund, your net returns need to be high and therefore most funds keep their fees as low as they can. The ranges presented above are very wide and most funds charge mid-range. A typical fee structure used to be “2&20”. This refers to a 2% annual management fee and a 20% performance fee. Over the last years, the fund space has become more competitive, and to be able to report excess returns, it could be said that the new standard is closer to “1&10” (1% M.F & 10% P.F).
Fund managers are free to decide how and how much they charge their investors. The key is to be able to generate excess net returns for investors and thrive financially internally to attract new talent & equipment. Did you know that the legendary Medallion Fund from Jim Simons charged a 5% management fee, and a 44% performance fee and still managed to generate a net annual return of 39% for over 20 years?
Speak to you soon!
Kind regards,
Joost