A Bloomberg article recently highlighted how some hedge funds are pocketing a hefty share of their clients’ gains with “no limit” fees. Some hedge funds take a bigger bite out of your returns than you might realize. However, there are always funds that deliver stronger fee-adjusted performance, if you know where to look.
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In 2023, the main hedge fund at billionaire Dmitry Balyasny’s eponymous firm notched a gross return of 15.2%. Investors walked away with a gain of just 2.8%.
The rest they paid in fees more than $768 million mainly for compensation but also a wide variety of other costs down to mobile-phone service.
That parceling out of costs is one of the most coveted perks of running a multi-strategy hedge fund. Investors are so eager to pony up money that they effectively write a blank check, agreeing to cover just about any expense managers deem reasonable, in good times and bad.
The term for that: Passthrough fees.
For some, the fees appear outrageously high. “Passthroughs are wild. You are paying for everything including the copier paper,” said Joe Reilly, chief executive officer of family office network Circulus Group.
Yet others view it as an acceptable trade-off for more reliable performance. They’re willing to shake off weak years, like Balyasny’s performance in 2023 which the firm calls “an anomaly in our 24-year history.”
A Bloomberg analysis of the group’s regulatory filings shows their publicly disclosed lists of expenses eligible to pass through have exploded in recent years. A decade or so ago, they typically called out run-of-the-mill categories like compensation, rent and computers.
Now, some firms specify that fees may include artificial intelligence, compliance costs, internal referral payments, the expense of terminating staff and catch-all items like “extraordinary or non-recurring expenses.