A question that came up recently was as follows: “I’ve been investing in hedge funds for some time. My advisor explained the fee structure to me and said hedge funds offer uncorrelated returns and possible outperformance, it makes sense. My question is Do you think it’s reasonable for a hedge fund to take 20% of my profits?
The answer is if they generate outsized returns net of their fees then why wouldn't it be reasonable? This is America! Making money is a good thing (as long as the socialist don't take over, then making money will be vilified). The problem is most hedge funds stink and getting paid to stink is more unAmerican than socialism! The trick is finding the managers that can consistently deliver these spectacular returns to warrant their fee. It is POSSIBLE to find these managers, but not PROBABLE since so few of them exist. And I hate to break it to you. Neither you nor your advsor will be able to find these winners whose returns are consistently worth it to warrant their fees. My advice is to avoid hedge funds all together and stick to a more traditional fee structure.