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New York: Why Aren’t Hedge-Fund Fees Dropping?

Competition, as any freshman economics student will tell you, brings down prices. It works for computers and for phone calls and for cars. Why not for hedge funds? Investors have been paying the same fees since practically the dawn of the hedge fund: a 2 percent management fee plus 20 percent of profits. Now that there are thousands of funds competing for capital, why hasn’t “2 & 20” become “1 & 10” or even “0 & 5”?

Quality is a major concern; no discounted fee will ever be deep enough to compensate for the cost of investing money with an incompetent manager. (Heart surgeons don’t tend to compete on price, either.) A hedge-fund manager who cuts his fee is signaling that he can’t persuade other investors to trust him…

Continued at New York Magazine, subscription free.

13th of April, 2007Other Writing • Comments off