Gross vs Net-of-Fee Returns

A fund report showing "18% annual return" is meaningless without knowing whether that figure is before or after fees, since the two numbers can differ enormously for the exact same underlying trading. Gross-of-fee return measures the performance of the actual investment strategy — what the trading decisions themselves earned, before any charges are subtracted. Net-of-fee return is what an investor actually receives, after management fees (a fixed percentage of assets, typically 1-2% annually) and performance fees (a cut of the profits, often 15-20%, usually above a hurdle rate) are taken out.

The gap between the two matters most in exactly the funds that look most attractive on a gross basis: a hedge fund charging a "2-and-20" fee structure with a 20% gross return only delivers roughly a 16% net return to investors once both fee layers are applied, and the gap widens further in strong years since performance fees scale with profit. Comparing one fund's gross return against another fund's net return — or against a benchmark index, which has no fees at all — systematically favors whichever number happens to be gross, which is why reputable performance reporting standards require funds to disclose both figures clearly labeled.

For anyone evaluating a manager, net-of-fee return is the number that determines actual wealth, while gross-of-fee return is the number that isolates skill from cost structure — both are useful, but only when you know which one you're looking at.