Fee Drag
Fee drag is the reduction in investor returns caused by management fees, fund expenses, and other costs over time.
Allocator relevance: Directly impacts net performance and can materially change whether a strategy is worth allocating to versus alternatives.
Expanded Definition
Fee drag compounds. A fee that looks “small” annually can become meaningful over a full fund life, especially when combined with expenses, incentive fees/carry, and slow deployment. Fee drag also interacts with the J-curve: paying fees early while capital is not yet fully productive can depress early net returns.
Allocators evaluate fee drag relative to strategy type, expected alpha, liquidity, and the manager’s ability to justify net outcomes after all costs.
How It Works in Practice
Teams model net returns under different deployment and distribution scenarios, compare fee schedules across managers, and look for hidden expenses. Co-investment and fee offsets can reduce fee drag, but only if the opportunity set and governance allow consistent participation.
Decision Authority and Governance
Governance includes approval of fee terms, negotiation via side letters, and ongoing monitoring of expenses. Transparent reporting is key to ensuring fee drag matches what was agreed.
Common Misconceptions
- Fees matter only if performance is mediocre.
- A “standard” fee structure implies fair economics.
- Expense transparency is automatic.
Key Takeaways
- Fee drag compounds across time and affects early years most.
- Net outcomes matter more than headline gross performance.
- Fee drag must be modeled, not guessed