Even ordinary people, not rich people, can invest in hedge funds. If you are able to invest a lump sum of money of US$30,000 or more, you can invest in hedge funds by using offshore tax havens where there is little or no tax.

However, one of the concerns when investing in hedge funds is the fees. What kind of fees are charged when investing in hedge funds?

In reality, the fees for investing in hedge funds are high. They charge various fees, including purchase fees and performance fees. However, the fact sheet we see shows the numbers after the fees are deducted, so there is no need to worry about it so much.

Even so, it is important to know the details of the fees before investing. So, let’s check what kind of fee structure is used when investing in hedge funds through offshore investments.

There Are Three Main Types of Fees for Hedge Funds

You can invest in hedge funds by using insurance companies (investment companies) located in tax havens. Hedge funds in most countries are a scam, but hedge funds in offshore regions can provide excellent returns.

There are three main commissions associated with hedge funds, all of which are high, and they are as follows.

  • Purchase fees
  • Management fees
  • Performance fees

In the case of the superior hedge funds, the annual income of the fund managers is unusually high. This is because hedge funds take these fees in exchange for increasing the assets of their clients. Let’s take a look at each of them.

Purchase Fees Vary from Hedge Fund to Hedge Fund

Hedge funds may charge a purchase fee. This varies from hedge fund to hedge fund, with some charging no purchase fee and others charging 5% of the investment amount as a purchase fee.

For example, the following is a hedge fund with a 5% purchase fee.

It is a high-risk, high-return hedge fund registered in the Cayman Islands and capable of 20-30% annual interest. I have invested in this hedge fund and was charged a 5% purchase fee.

I am planning to keep my assets in this fund for more than 20 years. Also, since the yield is high, I was able to quickly earn back the 5% purchase fee rate.

Among hedge funds, there are few funds that charge a purchase fee. However, many high-risk, high-return hedge funds charge a purchase fee.

-There Is a Surrender Charge

As a point of caution, many hedge funds set a surrender charge even if there is no purchase charge. Investing in hedge funds is designed for long-term investment, and fund managers do not like short-term trading by their clients, like investing in brokerage firms.

For this reason, most hedge funds charge a surrender fee for short-term cancellation even if there is no purchase fee. In this case, a surrender charge of 5% is common, and the charge decreases by 1% for each year that passes. Eventually, after five years, the surrender charge becomes zero.

For example, the following hedge funds have no purchase fee but a 5% surrender fee rate.

However, as the years go by, the surrender charge rate becomes lower, and after five years, the surrender charge becomes zero. This is the most common fee structure for hedge funds.

On the other hand, hedge funds that charge a purchase fee generally do not have a surrender fee.

Management Fees Are Charged Monthly

In addition to purchase and surrender fees, hedge funds charge a monthly management fee. This is a commission that is charged on your asset balance every month.

The management fee varies from hedge fund to hedge fund, and generally, a management fee of 1-2% is common. In other words, the fee is 1-2% per year on your asset balance. For low-risk hedge funds, the management fee is lower. High-risk, high-return hedge funds, on the other hand, have higher management fees.

For example, the following is the management fee for a high-risk, high-return hedge fund.

If you check the fact sheet, you can see that the management fee rate is 2% per year. This annual management fee is paid in monthly installments.

They Charge a Performance Fee

There are other types of fees you have to pay to hedge funds: performance fees. In a hedge fund, the fund manager manages your assets and tries to increase your money. They will charge you a performance fee for the increase of your money.

As for how much the performance fee will be, a low-risk hedge fund generally charges a performance fee of 15% of the amount of money made. On the other hand, for high-risk, high-return hedge funds, a performance fee of 20% is common.

For example, here is a fact sheet for a low-risk hedge fund.

As you can see, the performance fee is 15%. If your money increases as a result of the fund managing your assets, you will be charged a commission as a performance fee.

The Calculation Method Is Based on Monthly Increases

How is the performance fee calculated? In a hedge fund investment, the performance fee is charged monthly. The fund manager will try to increase your assets, and as a result, your assets will increase every month. The fund manager will then charge you a performance fee on the increased assets.

For example, let’s say that your assets have increased by $10,000 due to the management of your assets by the fund manager. In this case, you will be charged a performance fee on the $10,000 increase.

If the performance fee is 20%, then out of the $10,000, $2,000 is the hedge fund’s fee and the remaining $8,000 is your asset.

Of course, depending on the month, there may be negative returns. In the case of negative returns, you will not be charged a performance fee for that month. However, if you have a positive return, you will be charged a performance fee every month.

By Far the Highest Fees Compared to Mutual Funds

Because of this commission structure, it is clear that investing in hedge funds is very expensive compared to mutual funds.

For mutual funds linked to an index, the fees are extremely low. For example, the annual fee for the S&P 500 (VOO) is less than 0.1% of assets; the management fee for the Nasdaq 100 (QQQ) is about 0.2% per year.

The S&P 500 (VOO) is an index that invests in the top 500 companies in the US. The Nasdaq 100 (QQQ), on the other hand, is an index that invests in the top 100 companies listed on Nasdaq. When investing in these mutual funds, there are no purchase fees and no performance fees. In addition, annual management fees are low.

Therefore, compared to index investments, investing in hedge funds is unusually expensive in terms of fees.

The Fact Sheet Gives the Figures After Deducting the Fees

Why do so many people invest in hedge funds despite the high fees? The reason is that investing in hedge funds offers higher yields, even if you have to pay higher fees.

For example, it is widely known that investing in the S&P 500 (VOO) offers an annual interest rate of 7-9%. Also, the Nasdaq 100 (QQQ) has an annual interest rate of 13-15%. If you open an account with a brokerage firm and invest in the S&P 500 or Nasdaq 100, your money will grow.

On the other hand, for hedge funds, even low-risk hedge funds usually have an annual interest rate of about 10%. For high-risk, high-return hedge funds, the annual interest rate is 20-30%. It is important to note that these annual interest rates are after deducting the fees paid to the hedge funds.

For example, here is a fact sheet for a hedge fund that deals in real estate loans.

This hedge fund is a low-risk hedge fund because it does not invest in stocks or bonds. Yet, it has an average annual interest rate of 13.26%. If you check the fact sheet, you will see that it is more efficient than investing in S&P 500. Of course, I have also invested in this hedge fund.

It is true that investing in hedge funds has high fees. However, if you want to increase your money more efficiently than investing in mutual funds, investing in hedge funds is superior to investing in indexes.

Hedge Funds Offer Absolute Returns Regardless of the Economy

Another reason why many people invest in hedge funds is that they are not affected by the economy; the S&P 500 and Nasdaq 100 are very popular indexes, and many people invest in them.

However, in the case of stock investment, stock prices are always affected by the economy. Every few years there is a major recession, and it is normal for stock prices to drop by 40% or 50%. Therefore, you have to have the mentality to hold on to your stocks even if there is a major recession.

On the other hand, in the case of hedge funds, the economy is irrelevant because they aim for absolute returns.

For example, low-risk hedge funds invest in real estate, bridge loans, and other investments unrelated to stocks and bonds. Therefore, it can generate profits even in a global recession. For example, the following is a low-risk hedge fund that does not invest in stocks.

February and March of 2020 were the months when the coronavirus pandemic occurred, and stock prices crashed. However, we can see that the returns are positive regardless of these months. Therefore, if you invest in this hedge fund, you will not be affected by the economy.

In the case of high-risk, high-return hedge funds that invest in stocks, bonds, forex, and futures, they not only trade in long positions (buying) but also in short positions (selling). In other words, they try to make a profit even when stock prices are falling.

Therefore, even in a global recession, high-risk, high-return hedge funds are able to make a profit.

In the case of mutual funds, there is a 100% probability that their assets will be significantly reduced during a global recession. On the other hand, if you invest in hedge funds, you will not be affected by the economy.

You Should Invest in a Good Hedge Fund

One of the most important things to keep in mind is that you need to invest in a good hedge fund.

As mentioned earlier, hedge funds deduct purchase fees, management fees, and performance fees. Therefore, if a hedge fund has poor performance, your money will not increase at all. Rather, it will have a negative return.

So be sure to check the fact sheet to see what the actual yield performance of the hedge fund has been over the past five years. If the average yield is low, then the hedge fund is not worth investing in.

For reference, one of the least risky ways to invest offshore is known as offshore life insurance. Offshore life insurance has an annual interest rate of about 4%, and there is no point in investing in a low-risk fund unless the yield is higher than that. Therefore, a low-risk hedge fund is worth investing in if the average annual interest rate is 6% or higher.

On the other hand, for high-risk, high-return hedge funds, be sure to invest in funds with an average annual interest rate of 15% or higher. Also, usually, for high-risk hedge funds, we expect an annual interest rate of 20-30%.

Since it is widely known that investing in the Nasdaq 100 (QQQ) will yield 13-15% annual interest, it is not worth investing in hedge funds unless they yield more than this annual interest rate. Because of the high fees to be paid, high-risk hedge funds with an average annual interest rate below 15% are not worth investing in.

There are countless hedge funds. Be sure to choose hedge funds that offer excellent investment yields.

After you have opened an offshore investment account in a tax haven, an IFA (Independent Financial Advisor) will advise you on which hedge fund to invest in. Also, you can only open an offshore investment account through an IFA. Therefore, the most important thing is which IFA you apply from.

High Fees, but Excellent Efficiency in Asset Management

By using tax havens as offshore investments, anyone can open an offshore investment account and invest in hedge funds. However, the fees for hedge funds are very high. These fees include purchase fees, management fees, and performance fees.

Despite the high commissions, many people invest in hedge funds. The reason for this is that investing in hedge funds is a more efficient way to grow assets than investing in mutual funds.

Also, when investing in indexes, the stock price is always affected by the economy. On the other hand, a low-risk hedge fund will give you positive returns even in a recession. High-risk hedge funds are also able to generate returns regardless of the economy because they trade in short positions (selling) as well as long positions (buying).

This is the reason why many people invest in hedge funds even though the fees are high. Also, the numbers in the fact sheet are after deducting fees, so there is no need to worry about the high fees. Make sure you understand these and invest in good hedge funds.