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by JumpCrisscross
3470 days ago
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> Why aren't hedge funds compensated based on some sort of alpha, the difference from a benchmark? They usually (EDIT: sometimes) are. The 20% is typically (EDIT: has been in my recent experience) measured against a benchmark. The trick, however, is in selecting and/or constructing that benchmark. There are also as many definitions of alpha as there are hedge funds. |
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That is incorrect. The 20% refers to a fund management performance fee equal to 20% of all profits (without reference to any benchmark index). However, there is usually a "hurdle rate," like 5%, so 20% refers to 20% of all profits above the hurdle rate. There is also a "high water mark," so that past losses are counted against any "profits" to which the performance fee is applied.