A report released by LCH Research got widespread coverage with the Wall Street Journal making its headline, “Hedge-Fund Fees Eat Up Half of Clients’ Profits,” and Bloomberg chimed in with, “Hedge Funds Kept $1.8 Trillion as Fees, or Half Their Gains.” The coverage used words like “staggering” and “exploitation,” but I think this is an innumerate reaction.
Before getting to the right way to think about these numbers, I want to address the idea of forming estimates to the nearest hundred million dollars of the total return and total fees of all hedge funds since Alfred Winslow Jones invented them in 1949. It’s difficult even to define all hedge funds, and few of them disclose results to the public. The disclosures some make to databases are not complete enough to make accurate calculations. But LCH has access to a lot of non-public information and a solid reputation for accurate research. I don’t think they know the numbers to the nearest hundred million dollars, but there’s no reason to think their numbers are wildly wrong. Moreover the ratio of fees to investor returns is easier to estimate than the absolute dollar totals of either one.
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