An Equitable Structure for Hedge Fund Incentive Fees

Abstract

There are a variety of problems in fee structures between hedge fund managers and their clients. Examples here illustrate issues such as the free rider problem and the “claw-back” syndrome that can arise in fee contracts. A different “equalization” process that is both equitable and transparent to investors would involve multiportfolios that give any fund a structure similar to that of a partnership organization, and overcomes the current drawbacks in contracts. Application of this structure should improve fund manager and investor compatibility.