What Big Hedge Fund Fees Pay For

Financial advisers in the U.S. have been under pressure. Investors are skeptical of high costs and sales fees for financial products. Federal rules finalized in 2016 require advisers to put their clients’ interests ahead of their own when it comes to retirement accounts. Some of those rules aren’t in force yet, and the Trump administration has signaled that it would like to roll them back, but many advisers working with everyday individual retirement accounts and 401(k) rollovers have already changed their business practices.

One corner of the investing world that’s been more resistant to these trends is “alternative” investments, including private equity and hedge funds, which are sold to institutions and affluent individuals. The fees charged—traditionally 2 percent of assets plus 20 percent of any profits—can be hundreds of times higher than those of the lowest-cost mutual funds. The industry frames the fees as the price investors must pay to tap into top money managers.