Hedge fund managers typically charge an asset management fee based on the fund’s net assets, along with a performance-based fee structured as a share of the fund’s capital appreciation. The asset management fee is generally between 1% and 2% of the fund’s net assets, and is typically charged on a monthly or quarterly basis. The performance fee, structured as an allocation of partnership profits for tax purposes, has historically been 15 – 20% of each investor’s net profits for each calendar year.
Hedge fund performance fees are almost always subject to a “high water mark” mechanism that prevents a fund manager from earning a performance fee on the same gains twice. That is, the “high water mark” ensures that the manager has recouped all prior losses for an investor before the manager earns a performance fee with respect to that investor. Some hedge funds also utilize a “hurdle rate”, which requires that the fund achieve a stated return before the manager can earn its performance fee.