Research on Performance Fees by Eller Finance Professor Cited by Various Sources
June 23, 2020
Updated August 6, 2020
Hedge-fund investor research conducted by Eller College of Management Assistant Professor of Finance, Andrea Rossi, was recently referenced by The Wall Street Journal, National Review, Financial Times and Institutional Investor. The articles (log-in may be required) explain the impact that ‘performance’ fees charged by hedge-fund managers have on personal returns.
Each article cites the working paper, “The Performance of Hedge Fund Performance Fees” by Rossi and co-authors Itzhak Ben David and Justin Birru of Ohio State University. The research goes in-depth into the long-run outcomes associated with hedge funds' compensation structure.
“From 1995 through 2016, hedge-fund investors shelled out an average of 3.44% annually in management and incentive fees,” reads the Wall Street Journal article, in reference to Rossi’s research. “The study finds that investors earned net returns of only 1.96% annually—meaning they paid $1.76 in costs for every dollar they got to keep.”
In the National Review article, Rossi’s study is used to explain the role that incentive fee rates play in the hedge-fund industry, which is “attributable to the fact that hedge-fund managers are not liable for fees on losses.”
Financial Times speaks towards the science behind inconsistent returns and early closure of hedge funds, citing Rossi’s working paper as statistical support: “Investors earned $228bn in aggregate gross profits and paid $133bn in incentive fees in a sample of 6,000 hedge funds,” according to the study.
"Over the long run, the total performance fees paid by investors are more than 2.5 times higher than what they signed up for," says the Institutional Investor article, using Rossi's research as support. "These hedge funds, on average, charged a performance fee of 19 percent of gross profits."
Andrea Rossi joined the Eller College of Management in 2018 after earning his PhD in Finance from Ohio State University. A Chartered Financial Analyst, his areas of expertise include private equity, asset management, investor behavior and corporate insiders. He has also worked as a financial analyst for PFC and as a junior project manager for BNP Paribas.