HFs Posted Strong Gains in ‘24 but Fees Trending Higher — Evening Brief – 01.24.25
Hedge funds, following a “vintage year” of double-digit annual gains and robust alpha generation, have reaffirmed their value to investor portfolios. However, new data reveals that managers are retaining a growing share of these gains through higher fees, sparking renewed scrutiny of their cost-effectiveness.
The hedge fund industry demonstrated resilience during the volatility at the end of 2024, with PivotalPath’s Hedge Fund Composite Index posting a 0.3% gain in December. Managers effectively navigated the month’s market dip, which saw major indices relinquish some of their post-election “Trump Bump” gains.
PivotalPath’s latest Pivotal Point of View bulletin reported that its Hedge Fund Composite Index gained 10.7% in 2024. Notably, 88% of hedge funds tracked by the firm delivered positive returns, with an impressive average annual gain of 14.67%.
“December was challenging, but 2024 remained a vintage year for hedge funds,” PivotalPath noted, highlighting that all its main indices and sub-indices posted gains for the year—marking the first time this has occurred since 2019.
The broad-based gains in 2024 significantly boosted the hedge fund industry’s alpha generation. Multi-strategy and equity quant funds led the way, producing the highest alpha relative to the S&P 500 over the rolling 12-month period, at 9.5% and 9.1%, respectively. Credit managers followed closely with 8.9% alpha, while global macro managers generated 7.0% alpha.
Despite hedge funds delivering positive alpha in 2024, their broader contribution—and the associated costs—to investors’ portfolios has once again come under scrutiny.
New analysis by LCH Investments reveals that, of the estimated $3.7 trillion in gains generated by the hedge fund industry from 1969 to the end of 2024, approximately $1.79 trillion has been retained by managers in the form of fees. This equates to approximately 48.2% of gross gains over the past 55 years being retained by managers as fees, leaving investors with just 51.8% of the total returns.
The data, featured in LCH’s latest annual 20 Great Money Managers report, which examines the long-term performance of the hedge fund industry’s top performers, reveals a notable shift in fee structures. Up until the early 2000s, hedge fund fees accounted for less than 30% of gross gains.
However, in the past two decades, this percentage has risen to approximately 50.4% of gross gains. Rick Sopher, chairman of LCH Investments NV, the investment advisor of LCH, the fund of hedge funds unit of Edmond de Rothschild Capital Holdings, said the increase in fees “…is largely due to the increase in the management fee element, which has increased from around 10% to around 30% of gross gains.”
The top 20 hedge funds, including industry giants like Citadel, Millennium Management, Bridgewater, and D.E. Shaw, took an estimated 34.3% of gross gains. This is “considerably less” than the 55.7% of the remaining industry’s gains since inception, according to LCH.
“When hedge funds started in around 1969, early investors like LCH typically paid a management fee of 1% and a performance fee of 20%. Performance was generally strong, and fees remained at around that level until the 2000s,” Sopher said.
“But over the past two decades, as overall gross returns from hedge funds fell below the strong returns of the early decades, the level of fees actually increased; in the case of management fees, they increased to levels as high as 1.5% or even 2% or more,” he added.