Hedge fund investors are increasingly seeing their returns whittled away by the controversial ‘passthrough fee’ structure that allows firms to pass along nearly any expense, according to a report by Bloomberg.
As an example, the report highlights Balyasny’s flagship hedge fund, Balyasny Atlas Enhanced, which in 2023, generated a gross return of 15.2%, although after fees, investors were left with just a 2.8% gain.
These passthrough fees totalled over $768m for the year, covering costs ranging from employee compensation to office supplies and mobile phone services, and have become a hallmark of multi-strategy hedge funds including Citadel, Millennium Management, Point72 Asset Management, and ExodusPoint Capital Management, as well as Balyasny. Together, these five firms oversee more than $200bn in assets.
In Balyasny’s case, $670m — or 87% of the fees — went toward employee compensation and benefits, while other costs included recruiting, professional services, and travel expenses.
While critics argue that these fees can be excessive, others, see them as a trade-off for more consistent returns.
Multi-strats rely on these fees to attract top talent, invest in advanced technologies, and maintain flexibility in evolving markets. Firms say the structure helps reduce risk and improve performance, but the cost to investors is significant.
Bloomberg’s analysis shows that the list of eligible passthrough expenses among major multi-strats has grown by nearly 40% since 2018. While early disclosures focused on basic costs like rent and computers, today’s filings include items like artificial intelligence tools, severance payments, and even private jet bookings.
For example, Citadel’s recent filings detail passthrough costs that include employee gifts, snacks, and first-class travel. Between 2022 and September 2024, Citadel’s three largest funds charged $12.5bn in passthrough fees, with $11bn allocated to employee compensation.
ExodusPoint has taken a different approach by listing specific expenses it will not charge to investors, such as artwork. Still, firms like Point72 openly state in filings that there is “no limit” on the amount of passthrough expenses they can charge.
The impact on returns is stark. Multi-strats retained an average of 59% of every dollar they earned in 2023, up from 46% two years prior, according to BNP Paribas. This surpasses the traditional “2-and-20” fee model, where firms take 2% of assets under management and 20% of profits. For example, in 2023, ExodusPoint delivered an 11% gross return but charged 8.4% in passthrough fees, leaving investors with just over half of the gains. Similarly, Balyasny’s investors received only 18% of the fund’s gross returns after fees.
Despite the controversy, many investors remain loyal to multi-strats, betting on their ability to deliver steady annual returns of 12% or more with minimal downswings. The firms have avoided negative years in the past half-decade, a track record that appeals to clients seeking stability.
Bloomberg’s analysis used Form ADV Part 2 brochures that investment firms, including hedge funds, are required to submit annually to the SEC. The forms contain descriptions of a firm’s advisory businesses, investment strategies and fee structures.
The analysis focused on five of the biggest multistrategy hedge funds that have disclosed their passthrough fee structures since 2018, although research from Goldman Sachs shows that 80% of such firms have some sort of passthrough structure.
