Management Fee

Management fees are charged by mutual funds, exchange-traded funds, hedge funds, private equity funds, venture capital funds and wealth managers. They pay for staff, research, operations and the manager's profit.

In public funds such as mutual funds and exchange-traded funds, the management fee is part of the fund's ongoing charges and is deducted from the fund's assets. Fees range from very low for index funds to 1% or more for some actively managed funds.

In private equity and venture capital, management fees are typically around 2% a year of committed capital during the investment period, and often fall to a lower rate, or are based on invested capital, later in the fund's life. For example, a 500 million private equity fund charging 2% would collect 10 million a year in management fees.

Hedge funds have traditionally charged a management fee alongside a performance fee, in a structure once commonly described as two and twenty, meaning 2% of assets and 20% of profits, although fees have generally fallen over time.

Management fees are charged regardless of performance, so even small differences can significantly reduce investors' returns over many years.