Running a hedge fund is expensive. The first-year startup cost may range from $100k to $1 million and will require substantial legal, registration, and infrastructure costs. Operating costs range between 2% to 3% of assets under management (AUM) and consist of salaries, technical support, and compliance fees. For example, an average $100 million fund may have annual operating expenses of around $2 to $3 million. Trading fees, prime brokerage services, and leverage usage will add to the overall cost. In this context, managing costs well is a key foundation for long-term fund success.
Startup Costs
The cost to launch a hedge fund usually runs between $100k to over $1 million, depending on the intricacy of the strategy and legal structure. The largest cost would be legal fees—establishing an LLC or LP will usually range from $10,000 to $50,000, with qualifying in multiple jurisdictions adding another $100,000 to $200,000. On top of that, compliance costs alone (registering with the SEC) could be between $10,000 to $20,000. The marketing materials you need to create, and the accounting systems/trading platforms that must be built out, can run anywhere from $50,000 to $100,000. In fact, across the board, a hedge fund almost never costs less than $1 million to get started.
Operating Costs
Most of these costs (2% to 3% annually) are for office space, staff, and technical infrastructure. For a $100 million fund, operating expenses typically run between $2 million and $3 million a year. The greatest single point of expense is personnel—a small fund might spend $500,000 to $1 million on its staff, and a larger one more than $5 to $10 million. The annual technology infrastructure cost, including trading platforms and risk management systems, is around $100,000 to $200,000 per year. Funds allocate another $100,000 to $500,000 annually for compliance and legal expenses.
Prime Brokerage and Trading Costs
Fees for prime brokerage services depend on trading costs and leverage usage. Prime brokerage costs $500,000 to $1 million per year for mid-sized funds and between $5 million to $10 million for larger ones. Leverage fees usually range from 2% to 5% of the borrowed amount. For example, $100 million in leverage costs a fund between $2 million and $5 million in annual interest expenses. Trade settlement costs typically range from 0.1% to 0.5% of the value traded, meaning a typical fund trading $1 billion per year would expect to pay between $1 million to $5 million in trading fees.
Marketing and Investor Relations
Marketing and investor relations can cost the fund $50,000 to several hundred thousand dollars annually, depending on the size of the fund and the complexity of the marketing strategy. Funds that invest in 200 limited partnerships (LPs) may need between $10 million to $50 million toward investor relations. A small fund might require only two people, with total annual salaries between $400,000 to $800,000, while a larger fund may employ a team of up to 20 people, costing $2 million to $5 million annually. Meeting investors on the road can cost anywhere from $100,000 to $500,000 per year, with international roadshows adding to the expenses.
Management Fees and Performance Fees
There is the “2 and 20” fee structure, where most hedge funds charge a management fee of up to 2% and performance fees of about 20%. Management fees bring in $2 million each year for a $100 million fund, and a 10% return would generate an additional $2 million in performance fees. Smaller funds are unlikely to operate profitably on management fees alone—performance fees often determine whether a fund turns a profit. These fees are typically used to incentivize the management team, with top fund managers receiving annual bonuses between $5 million to $10 million.
Insurance and Risk Management
Hedge funds often buy Errors and Omissions (E&O) insurance and Directors and Officers (D&O) insurance to protect against litigation, compliance failures, and operational risks. Mid-sized hedge funds pay annual premiums of between $100,000 and $200,000, while funds managing over $1 billion may pay more than $300,000. E&O insurance covers legal issues arising from management decisions, while D&O insurance protects senior executives from personal liability, especially in cases of litigation brought by investors.
