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Who Charges More: Hedge Funds or Mutual Funds? *
Author(s) -
Kritzman Mark
Publication year - 2008
Publication title -
journal of applied corporate finance
Language(s) - English
Resource type - Journals
eISSN - 1745-6622
pISSN - 1078-1196
DOI - 10.1111/j.1745-6622.2008.00174.x
Subject(s) - open end fund , fund of funds , mutual fund , fund administration , performance fee , hedge fund , closed end fund , business , passive management , returns based style analysis , alternative beta , income fund , target date fund , manager of managers fund , finance , institutional investor , corporate governance , market liquidity
Explicit mutual fund fees are typically less than 1% of the assets under management. By comparison, the typical hedge fund charges a base fee of 2% plus a performance fee equal to 20% of net profits. Thus, hedge funds appear to charge far more for even comparable performance—unless one takes account of the following:• For most mutual funds, a very high percentage of performance is driven by its passive exposure to the market, even though the fee is applied to the total fund. • Many hedge funds are designed to provide returns that are completely independent of market performance.Using these two assumptions, the author provides a simple example that shows that a representative mutual fund's performance can be replicated by combining an index fund, which represents the mutual fund's passive component, with a hedge fund, representing the mutual fund's active component. When analyzed in this way, the fee of the combined fund turns out to be remarkably close to the actual fee of the mutual fund. This in turn suggests that the implicit fee for the mutual fund's small active component is comparable to the fees of the hedge fund.