2% Management fee, annualized and payable monthly

This way the investor only pays an additional incentive fee that is above the guaranteed managment fee...I see...this actually makes sense for the investor...

Michael B.


Quote from KevinK:

I know a fund that does 2% in the beginning of the year, so $200k, than 20% of all profits above x%. So lets say 10%, 21,000,000 would be a 105% gain, so 105-10%=95%*.2%, so 20% of 95%. so 11,000,000 profit-1,000,000 (10% of initial fund) so 20% of 10,000,000 or 2,000,000. I might be wrong because I just rushed, but something to that degree.
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Hey spike,

Can you put up the xls file...


Quote from spike500:

I made an error: the 20% incentive fee was calculated as 5% per quarter, which is wrong. The 20% stays 20% on te profit of the quarter. So this is the correct version.
So te manageùent fee would be 290,032.40 $ and the incentive fee would be 2,341,993.52 $
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I cannot understand the flames in this Forum when a trader wants to go institutional.

You know...trade your own money...

I can see a geometric growth earlier and perhaps a faster bottom line....

If I take my career and compare it to a private traders career and add up the total profit...I can see if a private trader super charges his career early on with enough AUM...he might excel faster to net a larger total career profit? (also wouldn't he be allowed to trade his own money, while managing a portfolio of OPM in a HF? or if not, even his Wifey could?)

What am I missing?

Michael B.


P.S. I think the better argument might be for the spammers in ET, is just don't use this Forum to get free advertising for your snake oil. But if my hypothesis is correct above there is motivation to manage OPM.
 
One more question:

Does a manager have the option of trading for more than one HF? Or does he remain loyal to that fund?...

Sorry for the Novice questions, Its just seems that for some reason there is not much in the archives here. Am I asking the easy questions that everybody is afraid to ask?

Michael B.
 
You need to figure out how much you can make given your own capital vs how much you can personally profit with the amount of OPM available that you can throw at your strategy. If the amount you can make off 1 and 20 happens to be less than you keeping 100% of the gains with your own account (where perhaps you would be more comfortable using greater leverage), then factor in your own risk tolerance to future losses -- are you willing to give up some gain for limiting your personal liability to 0? Does your method have enough scalable potential so that once you've proven you're successful with the initial opm amount it will have no problems accomodating future investors?

I think the issue boils down to that scalability question; most individual traders gravitate towards short-term trading of high volatility issues, yet this is the type of trading that probably suffers most in performance drag as the amount of capital goes much higher -- hence the flames against going opm. If instead you have some proven system in a deeply liquid market (like forex) that can scale up to amounts far greater than any on an individual account level, then jump in with both feet.

edit: I've only managed opm as far as family has been concerned, so this is just conjecture, I could be totally off base.
 
The problem I have illiquid is that I am not a good salesman. I also do not have the track record. But I have a vision and am putting in the time. It seems many of the HF's want graduates. I am not a graduate, but I can exchange with them fluently.

Your insights are always appreciated and you are understandable when expressing them.

Michael B.


Quote from illiquid:

You need to figure out how much you can make given your own capital vs how much you can personally profit with the amount of OPM available that you can throw at your strategy. If the amount you can make off 1 and 20 happens to be less than you keeping 100% of the gains with your own account (where perhaps you would be more comfortable using greater leverage), then factor in your own risk tolerance to future losses -- are you willing to give up some gain for limiting your personal liability to 0? Does your method have enough scalable potential so that once you've proven you're successful with the initial opm amount it will have no problems accomodating future investors?

I think the issue boils down to that scalability question; most individual traders gravitate towards short-term trading of high volatility issues, yet this is the type of trading that probably suffers most in performance drag as the amount of capital goes much higher -- hence the flames against going opm. If instead you have some proven system in a deeply liquid market (like forex) that can scale up to amounts far greater than any on an individual account level, then jump in with both feet.

edit: I've only managed opm as far as family has been concerned, so this is just conjecture, I could be totally off base.
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Quote from ElectricSavant:

Hey spike,

Can you put up the xls file...
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Michael,

I will give an example of a hypothetical fund. The performance has been chosen in such a way that you can see what happens when there is a drawdown., because this has implications on the incentive fee.
The fund charges a monthly management fee of 0.167% ( which represents 2% per year) at the beginning of each period, and an incentive fee of 20% which will be billed quarterly at the end of the period.

The spreadsheet is easy to understand; the management fees are calculated on the net value at the beginning of the period and the incentive fees are calculated on the net value at the end of the period. So for the monthly management fees you take the net value of the fund at the end of the previous period (beginning equity for the cioming month).
The only difficult calculations are perhaps for the period when there is a drawdown. So I added a drawdown in the months april and may.

Calculation of the management fee:
Beginning equity of the month * 0.167%

Calculation of the incentive fee:
Net ending equity of the quarter (so after the management fee has been deducted) minus the beginning equity of the quarter * 20%.
In the second quarter there was a drawdown, so the ending equity was lower than the beginning equity for the quarter. This means that there is no incentive fee at all. In this case we have to take as starting equity the ending equity from the last period where there was an incentive fee charged. In this case it was the end of march. From the end of march till end of september there was a profit, so on this net profit an incentive fee was charged.
The incentive fee can only be charged if there is a net profit for the client in that period, so he never pays fees before previous losses have been recuperated.
 

Attachments

Yes Spike,

I know about the incentive fee and how it works...I am now going to reread your post and examine the spreadsheet.

Thanks Again and good trading to you and have a great forth of July!

Michael B
 
interesting.

In KevinK's example if you had a system that experieced an extended drawdown the calculation he illustated could be advantagous regarding the management fee.

As far as the standard 2/20 deal the incentive fee is where the money is made, thats rather obvious, regardless of the which illustrations in this thread.

Michael B.

Quote from spike500:

Michael,

I will give an example of a hypothetical fund. The performance has been chosen in such a way that you can see what happens when there is a drawdown., because this has implications on the incentive fee.
The fund charges a monthly management fee of 0.167% ( which represents 2% per year) at the beginning of each period, and an incentive fee of 20% which will be billed quarterly at the end of the period.

The spreadsheet is easy to understand; the management fees are calculated on the net value at the beginning of the period and the incentive fees are calculated on the net value at the end of the period. So for the monthly management fees you take the net value of the fund at the end of the previous period (beginning equity for the cioming month).
The only difficult calculations are perhaps for the period when there is a drawdown. So I added a drawdown in the months april and may.

Calculation of the management fee:
Beginning equity of the month * 0.167%

Calculation of the incentive fee:
Net ending equity of the quarter (so after the management fee has been deducted) minus the beginning equity of the quarter * 20%.
In the second quarter there was a drawdown, so the ending equity was lower than the beginning equity for the quarter. This means that there is no incentive fee at all. In this case we have to take as starting equity the ending equity from the last period where there was an incentive fee charged. In this case it was the end of march. From the end of march till end of september there was a profit, so on this net profit an incentive fee was charged.
The incentive fee can only be charged if there is a net profit for the client in that period, so he never pays fees before previous losses have been recuperated.
More...
 
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