As I’ve written many times, assessing whether a product or strategy makes sense for a particular investor (whether individual or institutional) depends on facts and circumstances. At a minimum, one has to consider what an investor seeks to accomplish, relevant constraints, need for liquidity, overall risk tolerance and the risk-return profile of the product or strategy.

Costs are another factor and need to be compared to competing possibilities on an “apples to apples” basis. When this does not occur, it is hard to know whether fees are “reasonable.” Higher fees may be justified if an investor receives something it needs and is not getting from other vendors. The only way to know for sure is to delve into what fees represent.

Results of a just-published study of newly formed hedge funds illustrate the importance of understanding fee structures. According to The Seward & Kissel 2015 New Hedge Fund Study, asset managers may be willing to lower fees to attract investors but not without getting something back. “About 68% of the funds (as compared to 72% in 2014) offered lower incentive allocation and/or management fee rates to investors who agreed to greater than one year lock-ups…” This quid pro quo is not necessarily bad as long as an investor understands that there is no free lunch and can satisfy its liquidity needs elsewhere. Click to download The Seward & Kissel 2015 New Hedge Fund Study.