With storm clouds already building above the hedge fund industry, which as reported last night posted deplorable results in 2016 as only 32% of fundamental and quantitative funds outperformed their benchmarks according to JPM data - the worst performance this decade - leading to the largest redemption requests since the financial crisis, as over $100 billion was withdrawn from the industry last year, the latest shock to hedge fund investors, already displeased with underperforming the S&P for years, is the realization that they also pay for many if not all hedge fund expenses, resulting in substantial payments over and above those envisioned by the conventional 2 and 20% model.

The reason for their confusion and/or anger is simple: as Reuters points out, some of the more prominent hedge funds such as Citadel LLC and Millennium Management LLC charge clients for such costs through so-called "pass-through" fees, which can include everything from a new hire's deferred compensation to travel to high-end technology. And it all adds up with investors often paying more than double the industry's standard fees of 2% of assets and 20 percent of investment gains, which in light of recent performance has already infuriated countless investors leading to a historic outflow from active to passive managed funds.

Clients of losing funds last year, including those managed by Blackstone Group LP's Senfina Advisors LLC, Folger Hill Asset Management LP and Balyasny Asset Management LP, likely still paid fees far higher than 2 percent of assets.

Other funds, which at least made money, such as Millennium, the $34 billion New York firm led by billionaire Israel Englander, charged clients its usual fees of 5 or 6% of assets and 20 percent of gains in 2016, according to a person familiar with the situation. The charges left investors in Millennium's flagship fund with a net return of just 3.3 percent.

Clients of other shops that made money, including Paloma Partners and Hutchin Hill Capital LP, were left with returns of less than 5 percent partly because of a draining combination of pass-through and performance fees.

In some cases the pass-throughs fees have been truly egregious, and nowhere more so thatn for Ken Griffen's Citadel, which recently settled accusations it was frontrunning its clients using various HFT scheme. The $26 billion Chicago hedge fund charged pass-through fees that added up to about 5.3 percent in 2015 and 6.3 percent in 2014, according to another person familiar with the situation. Charges for 2016 were not finalized, but the costs typically add up to between 5 and 10 percent of assets, separate from the 20 percent performance fee Citadel typically charges.

And considering that Citadel's flagship fund returned 5% in 2016, far below its 19.5% annual average since 1990, it means investors likely ended up with nothing.

As Reuters notes, in 2014, consulting firm Cambridge Associates studied fees charged by multi-manager funds, which deploy various investment strategies using small teams and often include pass-throughs. Their clients lose 33% of profits to fees, on average, Cambridge found. In recent years the number has been far greater due to even more subdued returns. Surprisingly, the report found that funds would need to generate gross returns of roughly 19 percent to deliver a 10 percent net profit to clients. In other words, in a world in which single-digit Hedge Fund returns are becoming the norm, when one nets out all the expenses, investors end up with nothing.

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To be sure, this pass through structure is nothing new, and investors have for years tolerated similar charges; but they did so because of high net returns. However, due to ongoing performance lately, LPs are getting angry.

Defenders of the expenses, which can be used to cover any costs, from bar tabs, to private jet fees, to bonuses, say they are necessary to keep elite talent and provide traders with top technology. They said that firm executives were often among the largest investors in their funds and pay the same fees as clients. Citadel has used pass-through fees for an unusual purpose: developing intellectual property. The firm relied partly on client fees to build an internal administration business starting in 2007. But only Citadel's owners, including Griffin, benefited from the 2011 sale of the unit, Omnium LLC, to Northern Trust Corp for $100 million, plus $60 million or so in subsequent profit-sharing, two people familiar with the situation said.

Meanwhile investor frustration is showing. According to a 2016 survey by consulting firm EY, 95% of investors prefer no pass-through expense. The report also said fewer investors support various types of pass-through fees than in the past.

"It's stunning to me to think you would pay more than 2 percent," said Marc Levine, chairman of the Illinois State Board of Investment, which has reduced its use of hedge funds. "That creates a huge hurdle to have the right alignment of interests."

Precisely, which is also why investors pulled $11.5 billion from multi-strategy funds in 2016. Redemptions for firms that use pass-through fees were not available.

"High fees and expenses are hard to stomach, particularly in a low-return environment, but it's all about the net," said Michael Hennessy, co-founder of hedge fund investment firm Morgan Creek Capital Management.

Unfortunately for many hedge funds, the "net" is shrinking with every passing year, which is why most hedge funds have bet their careers on 2017 as the make or break year as a result of what they hope will be a surge in stock "dispersion." If it does not happen, the Netflix sequel of Billions may as well be called Millions.