Definition of Management Fee

What does the term "management fee" mean as it applies to the world of hedge funds? What is the definition of the term "management fee"?

Hedge funds typically charge two different types of fees - a performance fee and a management fee.

The performance fee is calculated based on the profits that a hedge fund generates. For instance, if a hedge fund has a performance fee of 25% and makes $100 million in profits for the fund's investors, the performance fee will be $25 million (25% of $100 million).

The management fee, on the other hand, is a smaller percentage that is calculated based on the amount of assets in a hedge fund to start a fiscal year.

For instance - let's say that a hedge fund has an annual management fee of 2%. Assuming that the fund has assets of $1 billion, this would mean that the fund would collect an annual management fee of $20 million.

The stated purpose of the hedge fund management fee is to pay for the fixed costs of running the fund. For instance, office rent, employee salaries and the cost of computer equipment would all be covered under the annual "management fee".

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Note: if you hear somebody say that a hedge fund has a "2 and 20" fee setup, this means that the fund has an annual management fee of 2% and a 20% performance fee. This is a fairly standard fee setup in the hedge fund world.

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