Think Your Mutual Fund Fees Are High?

By Admin | Apr 18, 2008

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In USA Today (courtesy of the Hampton Inn), I read an article in the money section about hedge funds managers payroll. Would you believe that the top 50 people earned $29 billion in 2007. Five earned more than a billion each while John Paulson of Paulson & Co earned $3.7 billion. George Soros earned $2.9 billion and James Simons earned $2.8 billion.

Maybe I should be saying “took home” rather than “earned.” It’s hard to imagine what you personally would have to do to actually “earn” almost $4 billion.

Hedge funds have a unique fee structure. They charge a percentage of the total investment you make plus a percentage of the profits. The “usual” is 2 percent of the initial investment and 20 percent of the profit. Some large, profitable funds have been able to charge as much as 5 percent of the initial investment and a whopping 40 percent of the profits.

Imagine rolling over $100,000 from an old 401k into an IRA based in a mutual fund. Bam–$2,000 gone right off the top. Then your fund manager hits the jackpot and gets you a 17 percent return on your remaining $98,000 but charges you that 20 percent fee. Your take? $11,328.

Under the same scenario with a no load mutual fund with fees of 0.75%, you would have made over $16,000. Now, if the hedge fund is doubling every year, then obviously the fees are worth it, but I have to question what kind of investments these hedge funds are making that cause the very wealthy to willingly surrender up to 40 percent. Therein lies the rub. Few people know exactly how hedge funds invest or what they invest in.

What can we learn from this? Seek funds with lower management fees, but if the fund has a track record of gargantuan returns, the fees might, just might be worth it.

Just for fun, how much is $4 billion dollars? Imagine a building that is 50 feet wide by 31 feet deep and about 9 stories high, filled with one dollar bills. A single stack of bills would be over 220 miles high.

Note:
How people spend their money and the fees they’re willing to negotiate are their prerogative. I don’t disparage anyone for making as much money as possible. That said, I still feel these sums are exhorbitant and ridiculous.

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