Hedge Fund Fees: The Pressure Builds

Ever since hedge funds came into vogue a decade ago, the so-called 2-and-20 has been the standard for fees. Investors, who pony up a 2% management fee and 20% of the profits each year, haven't had much reason to quibble. Few other investments have enjoyed outsize gains year after year.

But amid weak performance, the debate over expenses is heating up. Last year the average hedge fund gained 12.9% after fees, according to Hedge Fund Research Inc. The Vanguard 500 mutual fund, which tracks the Standard & Poor's 500-stock index and charges investors a slim 0.18% of assets, jumped 15.1%. "We have no problem paying high performance fees for a manager's selection, but we find taking on average market risk inherently unsatisfying," said Russell Read, chief investment officer of the $225 billion California Public Employees' Retirement System, at a recent conference.