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Recent figures reveal that since the emergence of hedge funds over 50 years ago, investors have shelled out nearly half of their gains on fees. LCH Investments, a hedge fund investor, reported that while fund managers generated $3.7 trillion before fees, a substantial $1.8 trillion, or about 49% of these gross profits, ended up as fees.
Dating back to 1969, this data highlights the rapid growth of manager fees as the industry matured. Rick Sopher, CEO of Edmond de Rothschild Capital Holdings and chairman of LCH Investments, explained, “Before 2000, fees were around a third of total gains, but they’ve climbed to about half as returns have decreased.”
This report follows a record-breaking year for the world’s top 20 hedge funds, which saw historic profits in 2024, thriving amid rising equity markets. Noteworthy among these were the multi-strategy hedge funds DE Shaw, Millennium Management led by Izzy Englander, and Ken Griffin’s Citadel, which also have some of the highest fees.
In 2024, Citadel held onto its title as the most profitable hedge fund ever, topping the charts for the third year, with DE Shaw and Millennium trailing in second and third place, respectively.
The elite 20 managers in the $4.5 trillion hedge fund sector reaped $93.9 billion in profits for investors in 2024, surpassing the previous high of $67 billion in 2023. Together, these top funds achieved asset-weighted returns of 13.1%, significantly outperforming the average hedge fund return of 8.3%, according to Hedge Fund Research.
For top-tier managers, fee takes were notably lower, absorbing just over a third of gross gains, as opposed to 55.7% for the industry at large since its inception.
Traditionally, hedge funds have charged a “two and 20” fee structure, encompassing 2% management fees annually and a 20% performance fee on gains. However, following the global financial crisis, this model faced scrutiny as investors voiced concerns over performance and market downturn protections.
LCH identified the increase in fee overhead from 30% to roughly 50% of gross returns as predominantly driven by heightened management fees. From consuming less than 10% of profits in the late 1960s and 1970s, management fees have surged to almost 30% in recent years.
This reveal indicates unsuccessful attempts by institutional investors and consultants to reduce fees uniformly, with management expenses increasingly infringing upon returns as gains shrink.
The rapidly expanding segment of multi-manager platforms has elevated average fees, according to prime brokers. These firms employ a “pass-through” model, transferring all costs—ranging from office rents to perks like client entertainment—onto investors rather than charging a fixed management fee. Annually, these expenses typically range from 3% to 10% of assets, with additional performance fees of 20%-30% charged on profits.
LCH ranks the most successful managers based on cumulative net dollar profits since inception, using internal estimates and data from Nasdaq eVestment and HFR.
Sopher noted LCH will wrap up operations this year, although Edmond de Rothschild will persist in hedge fund investments through its other group funds. Founded in 1969 as a pioneering fund of hedge funds, LCH saw each share’s original value grow 172 times by December 31, 2024, translating to an annual return of 9.8%.
