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Structure of HF Performance fees and Management fees
- Thread starter laurentc
- Start date
Thanks for all your replies.
I do not not really understand why a manager who offers a 0/30 fee structure could be seen as "desperate".
ImamicPH, would you mind explaining your first answer?
I also understand that an investor who can choose between 2/20 and 0/25 would prefer the 0/25, because of the very high breakeven.
But what about a breakeven BELOW the standard annual performance in the HF industry?
For instance, if a manager propose the a 0/30 and a 1/15, the breakeven gross annual return would be less than 8% (depending on the fee calculation method, it could even be around 5.66%)
If the performance of the fund is higher than this breakeven (and it should !), investors 'should' prefer 1/15 rather than 0/30, isn't it?
Do you think that there are some differences between the different kinds of investors about this fee structure?
For instance, do you the following assumptions can be true?
- the high-net worth individuals would prefer performance (even with risks), and would choose the 1/15 (or even 1/20) rather than 0/30.
They prefer the higher return when the manager is good enough to go over the breakeven (all the more since the breakeven not so high, for instance around 10% as it is the case in a 1/20 fee structure)
- the funds of funds would prefer reducing risks, thus they would prefer the 0/30% structure that allows them not to pay the 1% management fee when the fund does poorly, even if they have to pay more when the fund is very successful?
I do not not really understand why a manager who offers a 0/30 fee structure could be seen as "desperate".
ImamicPH, would you mind explaining your first answer?
I also understand that an investor who can choose between 2/20 and 0/25 would prefer the 0/25, because of the very high breakeven.
But what about a breakeven BELOW the standard annual performance in the HF industry?
For instance, if a manager propose the a 0/30 and a 1/15, the breakeven gross annual return would be less than 8% (depending on the fee calculation method, it could even be around 5.66%)
If the performance of the fund is higher than this breakeven (and it should !), investors 'should' prefer 1/15 rather than 0/30, isn't it?
Do you think that there are some differences between the different kinds of investors about this fee structure?
For instance, do you the following assumptions can be true?
- the high-net worth individuals would prefer performance (even with risks), and would choose the 1/15 (or even 1/20) rather than 0/30.
They prefer the higher return when the manager is good enough to go over the breakeven (all the more since the breakeven not so high, for instance around 10% as it is the case in a 1/20 fee structure)
- the funds of funds would prefer reducing risks, thus they would prefer the 0/30% structure that allows them not to pay the 1% management fee when the fund does poorly, even if they have to pay more when the fund is very successful?
Quote from late apex:
Actually, for most hedge funds and their investors, the opposite is true.
The "breakeven" gross annual return between 0/30 and the standard 2/20 is only 17.4%, under the most common fee calculation method. That is, above 17.4% the investor would be better off with 2/20 and the manager would be better off with 0/30. Now, we all know that the vast majority of HFs in the real world deliver average gross annual returns under 17.4% over time -- even with the large positive return boost from survivor bias. Therefore, as an investor, you're usually better off with 0/30, while as a manager, you're usually better off with 2/20.
Hope I can add to this discussion a bit. I considered doing this, moving from a 2-20 to a 0-25, but ultimately decided against it. I do have some accounts that are billed only on performance fee but they are few and far between.
Anyhow, I think a 2-20% is the best way to go for the manager. If you are a young fund and you hit a rough patch and you don't have a management fee to cover overhead it could cause some discomfort. You will hit a rough patch.
IMO 2-20 is fair to both parties and will ultimately help the manager out in the event of poor performance.
Anyhow, I think a 2-20% is the best way to go for the manager. If you are a young fund and you hit a rough patch and you don't have a management fee to cover overhead it could cause some discomfort. You will hit a rough patch.
IMO 2-20 is fair to both parties and will ultimately help the manager out in the event of poor performance.
Longview,
Thanks for your answer.
Did you receive some feedback from your current investors about your fee structure, either when they negociated their first investment with you, or added some money?
Do the ones who were granted a 0/25% now want to have a 1-2%/20% or something like this?
Do the ones who pay 2/20 tell you they would prefer a 0/25 or 0/30 deal?
Thanks for your answer.
Did you receive some feedback from your current investors about your fee structure, either when they negociated their first investment with you, or added some money?
Do the ones who were granted a 0/25% now want to have a 1-2%/20% or something like this?
Do the ones who pay 2/20 tell you they would prefer a 0/25 or 0/30 deal?
Quote from LongView:
Hope I can add to this discussion a bit. I considered doing this, moving from a 2-20 to a 0-25, but ultimately decided against it. I do have some accounts that are billed only on performance fee but they are few and far between.
Anyhow, I think a 2-20% is the best way to go for the manager. If you are a young fund and you hit a rough patch and you don't have a management fee to cover overhead it could cause some discomfort. You will hit a rough patch.
IMO 2-20 is fair to both parties and will ultimately help the manager out in the event of poor performance.
laurentc:
Longview,
Thanks for your answer.
Did you receive some feedback from your current investors about your fee structure, either when they negociated their first investment with you, or added some money?
Do the ones who were granted a 0/25% now want to have a 1-2%/20% or something like this?
Do the ones who pay 2/20 tell you they would prefer a 0/25 or 0/30 deal?
No, from what I can tell everybody is happy with their fee structure. Nobody has tried to renegotiate anything yet. I think most people would prefer a 0/25 or 0/20 to a 2/20 because if the manager doesn't make money the investor doesn't have to pay him anything.
Thanks for your answer.
I also do think so when the choice is rather obvious: the investor prefer paying less, and the 0/25 structure is much better than the 2/20 structure in almost any case 'except when the manager do as well as Warren Buffet consistently!
What is less obvious is the behaviour of the investors who can choose between a rather low fixed fee of 1/15 and a fee structure 0/25 for instance.
The investors SHOULD pay less with the 1/15 rather than with the 0/30 as soon as the manager is not too bad (achieving about 8%/year seems to be a minimum when the risk-free rate in the US is around 5%)
Do you think your investors would prefer the 0/30 fee structure (with the advantage you explain), or do you think that they would choose the 1/15, thus accepting to pay 1% even if the manager does not make any profit, because they SHOULD earn more 'net profits' as soon as the gross performance is higher than 8%?
I also do think so when the choice is rather obvious: the investor prefer paying less, and the 0/25 structure is much better than the 2/20 structure in almost any case 'except when the manager do as well as Warren Buffet consistently!
What is less obvious is the behaviour of the investors who can choose between a rather low fixed fee of 1/15 and a fee structure 0/25 for instance.
The investors SHOULD pay less with the 1/15 rather than with the 0/30 as soon as the manager is not too bad (achieving about 8%/year seems to be a minimum when the risk-free rate in the US is around 5%)
Do you think your investors would prefer the 0/30 fee structure (with the advantage you explain), or do you think that they would choose the 1/15, thus accepting to pay 1% even if the manager does not make any profit, because they SHOULD earn more 'net profits' as soon as the gross performance is higher than 8%?
Quote from LongView:
No, from what I can tell everybody is happy with their fee structure. Nobody has tried to renegotiate anything yet. I think most people would prefer a 0/25 or 0/20 to a 2/20 because if the manager doesn't make money the investor doesn't have to pay him anything.
laurentc:
Do you think your investors would prefer the 0/30 fee structure (with the advantage you explain), or do you think that they would choose the 1/15, thus accepting to pay 1% even if the manager does not make any profit, because they SHOULD earn more 'net profits' as soon as the gross performance is higher than 8%?
It really depends on the particular investor. I think 0/30 is going to be high for any investor. If I was going to do 0 management fee I would not go above 25 on performance fee. Unless your record is such that you can warrant that kind of payment.
Quote from LongView:
No, from what I can tell everybody is happy with their fee structure. Nobody has tried to renegotiate anything yet. I think most people would prefer a 0/25 or 0/20 to a 2/20 because if the manager doesn't make money the investor doesn't have to pay him anything.
Well he will pay some commissions, but true.
As a manager, I would prefer 0-30, but that only makes sense if you have 5 million or more to manage...
imagine a client gives you 100K, and you DOUBLE said client's money, AFTER FEES, you wind up with 30K.
You would be the greatest AND poorest money manager in the world.
BFD!
Ok.
So I also think that:
- most investors would be rational and they would prefer paying less on the long term
- some investors may prefer 'paying less when they earns less' (thus they would prefer 0/25-30 rather than 1/15-20) to avoid paying fees when the returns are very poor, while accepting to pay much more when the manager is very successful.
What about the Third-Party marketers?
Does anyone know their thoughts about the fee structure?
I fear that many 3PM may not like the fund which have lower fees. They would receive less from the manager, unless they negociate a very high % (50%?) of the manager fees.
I also fear that a fund without "management fees" could be an issue for the 3PM, as they could fear not to earn anything if the manager remains underwater for a long time.
On the other hand, the 3PM could see that such "lower fees" should allow to broadcast a better track record... thus should help attracting new investors.
The absence of "management fees" would be another great reason to invest in the fund, so the 3PM should be able to sell the fund more easily.
What do you think?
So I also think that:
- most investors would be rational and they would prefer paying less on the long term
- some investors may prefer 'paying less when they earns less' (thus they would prefer 0/25-30 rather than 1/15-20) to avoid paying fees when the returns are very poor, while accepting to pay much more when the manager is very successful.
What about the Third-Party marketers?
Does anyone know their thoughts about the fee structure?
I fear that many 3PM may not like the fund which have lower fees. They would receive less from the manager, unless they negociate a very high % (50%?) of the manager fees.
I also fear that a fund without "management fees" could be an issue for the 3PM, as they could fear not to earn anything if the manager remains underwater for a long time.
On the other hand, the 3PM could see that such "lower fees" should allow to broadcast a better track record... thus should help attracting new investors.
The absence of "management fees" would be another great reason to invest in the fund, so the 3PM should be able to sell the fund more easily.
What do you think?