Are Long-Only Hedge Funds Worth the Cost?


Hedge fund managers are moving away from leverage and short-selling strategies into the long-only strategy used by plain-vanilla mutual funds. Many of these long-only hedge funds charge base fees of 1.0 to 1.5 percent plus a performance fee based on a percentage of the profits. Historically, hedge fund performance fees have been as much as 20 percent.

This may be more than many investors are willing to pay, especially when Vanguard’s total stock market index admiral shares charges 0.06 percent, and the average expense ratio of similar funds is 1.12 percent (according to Vanguard). Most hedge funds underperform such index funds over the long term.

Still the hedge fund world expects the high-fee, long-only business to grow. The main attraction for hedge funds is more clients and more fees. In switching their marketing style, hedge fund managers seem to recognize that more clients are unwilling to accept the risks associated with leverage, short-selling and other alternative strategies long associated with hedge funds.

Large institutional clients like pension funds with $500 million to $1 billion in assets are being aggressively targeted, but hedge funds are really looking to expand their investor pool even further (“Hedge Funds Play Long Game for Profits,” The benefits to hedge funds are easy to see, but the benefits to potential investors are less than clear.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.