So I understand how a Hedge Fund gets it’s fees, it just liquidates a small part of their portfolio and pay themselves, but Funds of Hedge Funds have to invest in other funds with definite lock up periods, how do they get their annual fee? Or their performance fees for that matter?
Thanks!
All funds hold a certain amount of cash to pay salaries, redeem shares, and invest when the balance grows large enough. They can take their fee out of the cash fund maintained for such purposes.
If it’s locked up, you can’t get to it either. If they have no cash to take then they just hold the obligation on their books and take it out of the payments from the funds when they become available. Besides, they have cash coming in from other investors. They can take their fees out of the cash before it gets invested and prorate the ownership interest of the investments on their books.
Funds of funds are a great investment idea! FOF charges 2% management fee and 20% of profits. It invests in Fund-A which charges charges 2% management fee and 20% of profits. Now you’re down 4% per year in management fees no matter what, and if Fund-A makes money , thay take 20% when they pass it to FOF which claims 20% before it gets to you. Maybe you can find a fund which invests in funds-of-funds and can pay triple fees.