Hedge funds charging higher performance fees are more successful at producing consistent long-term absolute returns, according to a report by Preqin.
Funds charging performance fees higher than 20% have delivered the strongest net returns in four out of the last six years, suggesting that the higher fees charged by these managers are at least partly justified because they outperform their peers.
Funds charging performance fees of more than 20% have also achieved the highest net returns over the last three and five years on an annualized basis compared with funds charging 20% or less.
| Less than 20% | 20% | More than 20% |
Year-to-date returns (as of July 31, 2013) | 6.35% | 4.1% | 7.29% |
12-month returns | 13.32% | 8.69% | 13.29% |
Three-year annualized | 6.89% | 7.98% | 10.73% |
Five-year annualized | 7.31% | 8.34% | 10.55% |
Source: Preqin Hedge Fund Analyst
“This shows that funds with higher performance fees are generally producing better and more consistent longer-term net returns, which is attractive to many investors in this low interest rate environment,” the report states.
However, funds charging less than 20% have achieved the highest net returns over the past 12 months (as of July 31, 2013), highlighting the fact that higher fees do not always correlate to better short-term performance.
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