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The Journal of Alternative Investments

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The Myth of Hedge Fund Fee Diversification

Fei Meng, David Saunders and Luis Seco
The Journal of Alternative Investments Fall 2019, 22 (2) 35-45; DOI: https://doi.org/10.3905/jai.2019.1.077
Fei Meng
is a PhD student in the Department of Statistics and Actuarial Science at the University of Waterloo in Waterloo, Ontario, Canada
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David Saunders
is an associate professor in the Department of Statistics and Actuarial Science at the University of Waterloo in Waterloo, Ontario, Canada
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Luis Seco
is a professor in the Department of Mathematics at the University of Toronto and president and CEO at Sigma Analysis and Management Ltd. in Toronto, Canada
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Abstract

Many innovative hedge fund fee structures have been introduced in recent years in response to concerns about both the level of hedge fund fees and the incentives they may provide. A traditional fee structure consists of a flat fee charged as a percentage of the assets under management, together with a performance fee consisting of a percentage of the profits earned. A fee structure that has become more popular recently is the first-loss structure, in which the manager receives a higher performance fee in return for providing some downside protection to investors by insuring some of their losses. Combinations of these fee structures have also been proposed, with the possibility that investors may benefit from some diversification among the fee structures. By considering the investors’ risk–reward trade-off, the authors show that there is in fact very little benefit from such fee diversification.

TOPICS: Real assets/alternative investments/private equity, performance measurement

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The Journal of Alternative Investments: 22 (2)
The Journal of Alternative Investments
Vol. 22, Issue 2
Fall 2019
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The Myth of Hedge Fund Fee Diversification
Fei Meng, David Saunders, Luis Seco
The Journal of Alternative Investments Sep 2019, 22 (2) 35-45; DOI: 10.3905/jai.2019.1.077

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The Myth of Hedge Fund Fee Diversification
Fei Meng, David Saunders, Luis Seco
The Journal of Alternative Investments Sep 2019, 22 (2) 35-45; DOI: 10.3905/jai.2019.1.077
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  • Article
    • Abstract
    • PORTFOLIO OF FEE STRUCTURES
    • PERFORMANCE RATIO MAXIMIZATION WITH PORTFOLIOS OF FEE STRUCTURES
    • NUMERICAL RESULTS
    • CONCLUSION
    • ADDITIONAL READING
    • ENDNOTES
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