Hedge fund managers pocket almost half of their investment returns as fees.

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Since the industry’s early days half a century ago, investors in hedge funds have paid out half of their profits in fees, new data shows.

Managers generated $3.7tn of total profit before fees, while fees paid to investors were $1.8tn, or about 49 per cent of total profit, according to an analysis by hedge fund investor LCH Investments.

In the year Statistics from 1969 show how the amount paid by managers increased as the industry matured.

“Until 2000, hedge fund fees were about a third of total profits, but since then it has grown to half,” he said.
Rick Sofer, CEO of Edmund de Rothschild Capital Holdings and Chairman of LCH Investments. “As returns go down, fees go up.”

New research comes after the world’s 20 most successful hedge funds posted their biggest gains in 2024, according to LCH – for the second year in a row and on the back of rising equity markets.

The best-performing net-fee returns last year were three multi-strategy hedge funds: DE Shaw, Izzy Englander’s Millenium Management and Ken Griffin’s Citadel. They also have some high overall fees.

Citadel topped the rankings for the third consecutive year as the most profitable hedge fund of all time in 2024, with DE Shaw and Millennium in second and third place, respectively.

The top 20 managers in the $4.5tn hedge fund industry LCH said it expects total returns to investors of $93.9 billion in 2024, up from a record $67 billion in 2023.

Data from the Hedge Fund Survey indicates that 13.1 percent generated high returns on assets, outperforming the average hedge fund of 8.3 percent.

Managers in their 20s took more than a third of their total earnings far less in total pay, compared with 55.7 percent for the rest of the industry since its inception, LCH found.

Hedge funds are historically known for their “two and 20” fee model, where investors pay annual management fees of 2 percent and performance fees of 20 percent on investment returns.

However, this has come under pressure after the global financial crisis, as investors have complained about performance and lack of protection against market falls.

The increase in total fees from 30 percent to 50 percent of gross profit is largely due to higher management fees, according to LCH.

While management fees consumed less than 10 percent of gross profits in the late 1960s and 1970s, in the past two decades they have represented about 30 percent, LCH said.

The shift suggests that efforts by institutional investors and investment advisers to reduce fees across the board have failed, and management fees are driving up profits as profits decline.

The fastest-growing hedge fund industry, according to prime brokers, has been multi-manager platforms, which have pushed up average fees.

Such firms have a “pass-through” cost model where the manager passes all costs to their principal investors instead of taking an annual management fee.

That can cover office rent, technology and data, salaries, bonuses and client entertainment. It usually varies from 3 to 10 percent of assets every year. A performance fee of 20-30 percent of profit is usually paid on top.

LCH The list calculates which managers have been the most successful based on the total dollar return they have made to investors since inception. The sources of the calculations are LCH’s internal estimates, as well as data from Nasdaq eVestment and HFR.

Soffer said LCH will close as a fund this year but Edmond de Rothschild will continue to invest through other funds in the group.

LCH, the world’s first fund of hedge funds, was founded in 1969. The price of one share, if purchased at the launch of the fund, multiplied by 172 times December 31 2024, representing a return of 9.8% per year.