(Bloomberg) -- With a spate of hedge fund managers set to launch multibillion-dollar funds this year, a veteran hedge fund manager warns that surging costs could doom them to fail.

“There are some really high cost structures in the hedge fund world, like 8% fixed costs,” said Knighthead Capital Management co-founder Tom Wagner, speaking at Bloomberg’s Hedge Fund Startup Conference on Wednesday. “That’s insane. Insane.” 

New hedge funds are facing a double-whammy of a tougher fundraising environment  — putting pressure on them to keep costs low — and a need to pay up for talent. Alumni from giant firms like Millennium Management and Ken Griffin’s Citadel are forming some of the biggest startups of all time, putting them in competition with one another to attract top-tier investment professionals. 

Wagner said a failure to control costs — and overpaying for people who don’t work out — can stunt hedge funds before they have a chance to hit their stride.

“I think the reason a lot of firms fail in that first three-to-five-year period is because they build themselves, or expect stratospheric growth,” said Wagner. “The reality is, it can be really lumpy. You just don’t know.”

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Mike Rockefeller, who co-founded long-short equity hedge fund Woodline Partners in 2019 after leaving Citadel, said big investors in hedge funds value stable, durable businesses. 

He said that building those kinds of shops takes not just star traders, but also teams to support those investors, which can add up. Woodline launched with $2 billion and also recently invested $500 million in a new startup firm. 

“A durable, successful hedge fund is a lot like an F1 racing team,” Rockefeller said. “You have the racers, you have your investment team, that’s the DNA of your business. But without a great car, you can’t win races. And behind those cars, you have mechanics, engineers, strategists, teams of people that are helping.”

While some high-profile hedge funds charge their investors so-called pass-through fees, which allow for flexibility to pay star traders more in boom times, that’s not the case for most firms. 

Ilana Weinstein, the founder of recruiting firm IDW Group, said that means many firms will have to net out such costs to prioritize the higher performers. That could necessitate job cuts to eliminate weaker performers. 

If hedge funds have to pay top talent less in order to keep compensating those who are lagging, “You’re going to end up losing your best people,” she said. 

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