Hedge Funds Cut Back on Fees

Pressure from disappointed investors is forcing hedge funds to roll back their fees, putting the standard charge of 2% of assets under management and 20% of investment profits on the endangered list.

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"Most hedge funds aren't worth 2/20, and the smart money has made inroads toward better terms," said Michael Smith, managing director at Global Endowment Management LP, which invests for clients.

When Merchants' Gate Capital LP started in 2007, the stock-focused firm charged management fees of 1.5% or 2%, depending on how long investors locked up their money. In July, it trimmed that to 1.25% and 1.75%. The firm, which manages $2 billion, sought to compete with firms lowering their fees, said a person close to the matter.

Others go further. David Iben, an investment veteran who this year started Kopernik Global Investors LLC in Tampa, Fla., is charging fees of just 0.25% plus 20% of profits for a new "long-short" hedge fund, or one that will both buy stocks and bet against them.