Gross-of-fee returns

Gross-of-fee returns show how well a hedge fund's investments performed before the fund manager took out any fees. This gives you a "raw" picture of how successful the investment strategy was, separate from how much the manager charged for their services.

For example: if a hedge fund made 15% on its investments in a year, that's the gross-of-fee return. But if the fund charged 2% in management fees Management fee Management fee refers to a recurring fee, typically calculated as a percentage of assets under management, that hedge funds charge investors to cover operational and administrative expenses regardless of fund performance. and 20% of profits as performance fees Performance fee A performance fee is compensation paid to a hedge fund manager based on the fund's investment profits, typically calculated as a percentage (commonly 20%) of returns above a specified threshold, subject to high-water marks and potentially hurdle rates. , investors would actually receive less than 15%. The net-of-fee return Net-of-fee returns Net-of-fee returns represent investment performance calculated after deducting all fees and expenses, including management fees and performance allocations, providing investors with the actual returns they would have received from their investment in the hedge fund. shows what investors actually got after paying all fees.

This measurement helps investors evaluate the manager's actual investment skill. It separates the question "How good is this manager at picking investments?" from "How much does this manager charge?"

The Securities and Exchange Commission (SEC) has strict rules about how investment advisers can show gross performance numbers. The SEC generally prohibits advisers from showing only gross returns without also showing net returns.

The Commission worries that gross-only performance figures mislead investors. These numbers make the fund look better than what investors will actually experience. Simply mentioning the fees alongside gross performance isn't enough, because investors have trouble calculating how fees compound over time and eat into their returns.

When advisers manage accounts with different fee structures, the SEC allows them to show performance net of the highest fees they charge to any client. However, they must clearly explain how they calculated these numbers.

The SEC does allow some specific situations where advisers can show gross performance without net figures. In private, one-on-one meetings with sophisticated investors, advisers may present gross performance if they provide detailed disclosures.

These disclosures must include several key points. First, they must clearly state that the results don't include advisory fees and expenses. Second, they must explicitly tell clients that their actual returns will be lower after paying fees. Third, they must refer clients to the adviser's Form ADV Form ADV Form ADV is the uniform form used by investment advisers to register with the SEC and state securities authorities, containing detailed information about the adviser's business, ownership, clients, employees, business practices, affiliations, and disciplinary history. Part 2, which is a regulatory document that describes fees for registered advisers. Finally, they must provide concrete examples showing how fees reduce portfolio value over multiple years.

There's an important catch: advisers cannot reuse these presentations across multiple meetings while keeping these regulatory protections. Each presentation must be truly individualized.

Current SEC rules allow advisers to share gross performance data with consultants under certain conditions. The consultant must agree to present this information only in individual client meetings and must include all required disclosures.

Advisers may also display gross performance in broader settings, like marketing materialsDocuments, presentations, and other communications used to promote investment opportunities to prospective investors. or presentations to multiple people. However, they must simultaneously show net performance with equal prominence and provide clear explanations of how they calculated both numbers and how fees impact returns.

In March 2025, SEC staff issued updated guidance that significantly expanded when gross performance can be presented. Under the new rules, advisers may show gross performance of individual investments or groups of investments without showing corresponding net figures.

However, there's a key requirement: they must prominently display both the gross and net performance of the total portfolio from which these individual investments were selected. This change particularly helps private fund managers, who can now present case studies and highlight successful investments on a gross basis. Investors can still assess the overall impact of fees by looking at the complete portfolio performance data.

Gross-of-fee returns serve several important purposes for investors and analysts. First, they help evaluate the manager's underlying investment skill and strategy effectiveness. Second, they allow comparison of performance across funds with different fee structures. Third, they help assess how much fees impact net investor returns. Finally, they let analysts examine manager performance separately from their compensation arrangements.

This measurement proves particularly valuable for institutional investors who might hire managers for separate accounts or negotiate fee arrangements. These large investors often have the leverage to negotiate different fee structures than smaller retail investors.

Many hedge fund databases and performance reporting services track both gross and net returns to provide comprehensive performance analysis. This dual reporting helps users understand both the manager's investment skill and the practical returns available to different types of investors.

Gross returns remain especially useful for institutional investors evaluating managers for separate account mandates or negotiating fee arrangements. However, all presentations must comply with applicable advertising and marketing regulations, which vary depending on the audience and context.