Hedge Funds and Performance Fees

Another hedge fund announced its intention to shut down after having experienced significant losses.  The firm's announcement created the impression that it was closing in order to protect further investor losses but there may be a less honorable reason for the closure.  The real motive is more likely tied to the fact that hedge funds are usually dependent upon positive investment returns to generate performance fees - the really lucrative part of hedge fund compensation.  Having dug itself into a major performance hole, the firm recognized that it would not qualify for a performance fee until it recouped the significant losses. 

It was in the interest of the hedge fund and not its investors to simply shut down.  After all, had it stayed open and kept investors' funds at work, investors stood to earn a positive return and the poor hedge fund manager would have been entitled only to its management fee. - - Boo Hoo!

I'm sure the managers will start a new fund soon so they can begin at square one. And these are the folks that Greenspan thinks shouldn't be regulated like the rest of us.

Susan