Question of the Week – Alternative Investments

Hedge
fund fees are usually calculated as a percentage of assets under management. That is, the
total amount invested, plus/minus any returns to date.

Private
equity fees, on the other hand, are based on committed capital. In order to invest in a new fund, an investor
might be required to commit $1M over the course of the next five years. Perhaps
there is a schedule, $500K the first year, $300K, $150K, then $50K the last
year. Where hedge funds would charge fees over $500K in the first year, private
equity would use the full $1M.