Would you manage OPM without an asset management fee?

[crgarcia]

To attract customers you have to offer something the big hedge funds, don't.

Of course you can expect to charge less, you aren't famous -yet-.

 

[Kevin Schmit]

Quote from Dr. Zhivodka:
I think you should a -20% and 50% deal.
Be a trend setter.

That structure is not a bad one, just your numbers are a little off. I did a -12% and 95%, principal guaranteed deal a few years ago that worked out pretty well.

 

[ginux]

Quote from Kevin Schmit:

That structure is not a bad one, just your numbers are a little off. I did a -12% and 95%, principal guaranteed deal a few years ago that worked out pretty well.

Isn't that like a loan?

 

[ginux]

Quote from dabao91:

�0% Management Fee & 30% Incentive Fee� vs.
�2% Management Fee & 20% Incentive Fee�

Please compare the following two fee structures (A/B) and post what you think about the pros and cons for each options in both clients and advisors point of view.

Compare two Fee Structures:
A. Fee Structure A (0% Management Fee & 30% Incentive Fee) --- For this fee structure, client does not pay any monthly management fee. Client only pays 30% monthly incentive fee when the account has a positive New Trading Profit.
B. Fee Structure B (2% Management Fee & 20% Incentive Fee) --- For this fee structure, client pays 2% annual management fee first independent to the account has a positive New Trading Profit or not in such month (payable at approximately 0.1667% (2% divided by 12 months) per monthly every month) and client also have to pay 20% monthly incentive fee when the account has a positive New Trading Profit. This is a very popular fee structure.

Assumptions:
� It is assumed that a client open an account with initial account size US $100,000 at the beginning of month.
� It is further assumed that the account has a positive New Trading Profit (pre management and incentive fees) of $X dollars at the end of such month.
� See below for more assumptions.

For the month, the total fee to pay to Advisor based on Fee Structure A:
� The management fee will be 0.
� The incentive fee will be 0.3X (X times 0.3).
� The total fee will be 0.3X (0 plus 0.3X).
� This fee calculation is simper than the one for Fee Structure B.

For the month, the total fee to pay to Advisor based on Fee Structure B:
� The management fee will be [(100,000+x)*(0.02/12)].
� The incentive fee will be [((100,000+x)*(1 - (0.02/12)) - 100,000) *(0.2)].
� The total fees will be the sum of the management fee plus the incentive fee:
[(100,000+x)*(0.02/12)] +
[((100,000+x)*(1 - (0.02/12)) - 100,000) *(0.2)]
= 0.2014X + 140.
� This fee calculation is more complicate than the one for Fee Structure A.

The Approximate Break Even Point. In order for client to pay the same total fee to Advisor in either fee structures:
� The fee (0.3X) for Fee Structure A must be equal to the fee (0.2014X + 140) for Fee Structure B, so X is approximately equal to $1420 (140/(0.3 -0.2014)).
� The percentage return (pre management & incentive fees), New Trading Profit, is approximate 1.42% ($1420/$100,000) for the month.
� To simplify the calculations, we further assume each month has the same approximate 1.42% return (pre management & incentive fees). Please note that this assumption is unlikely to happen in real live. It is used just for illustration purpose to demonstrate break even point concept only. The annually compound return (pre management & incentive fees) will be approximate 18.44% in order for client to pay the same total fee in both fee structures.
� Please note that approximate 1.42% monthly return is pre management & incentive fees, but the return after management & incentive fees is approximate 0.994% (1.42% times (1 minus 0.3)). The annually compound return (after management & incentive fees) will be approximate 12.6% in order for client to pay the same total fee in both fee structures.
� It may be likely (but not always) that client may pay less in the total management & incentive fees using Fee Structure A if the annual return is below the approximate break even point which is approximate 18.44% (pre management & incentive fees) or approximate 12.6% (after management & incentive fees).
� It may be likely (but not always) that client may pay more in the total management & incentive fees using Fee Structure A if the annual return is over such approximate break even point.
� Please note that the approximate numbers cited in here are just for illustration purpose to demonstrate the approximate break even point concept only.

What is defined by New Trading Profit?
Take the following as an eg.

Month 1: Current Return = 10%
Month 2: Current Return = 5%
Month 3: Current Return = 15%

In the above scenario, what is the new trading profit in each case? Am i right to assume the following:

Month 1: New Trading Profit = 10%
Month 2: New Trading Profit = 0%
Month 3: New Trading Profit = 5%


If that is the case, isn't it very unfair for the investors but advantageous for the manager? See below

Month 1: Current Return = 50%
Month 2: Current Return = 500%
Month 3: Current Return = 1%

The investors have to compensate the manager for the massive profit in month 2 but the manage lost most of the profits in month 3. So the 2nd month compensation is for nothing.

I've always thought compensation is charged on an annual basis, instead of monthly

 

[TSGannGalt]

From my personal experience, investors aren't that stingy about the management / performance fee, if it's within the industry standard. Like in a 4 hour meeting:

"What do you charge?"

"2-20"

"Oh. OK"

That's like 6-7 seconds. The rest of the 4 hours is about the other stuff.

 

[Kevin Schmit]

Quote from ginux:

Isn't that like a loan?

Yes, with a small share of the profits thrown in
as a kicker. A fairly common arrangement.

 

[dabao91]

I would set the % at least at 30%. The higher you go, the more motivated you will be and you need to explain that to the potential client(s). I would actually prefer this over a small yearly mgmt fee and a smaller % of profits.

Why you feel that way? Why 30% is better?

 

[ginux]

Quote from Kevin Schmit:

Yes, with a small share of the profits thrown in
as a kicker. A fairly common arrangement.

How do you ensure the principal guaranteed thing?

 

[ginux]

Quote from ginux:

What is defined by New Trading Profit?
Take the following as an eg.

Month 1: Current Return = 10%
Month 2: Current Return = 5%
Month 3: Current Return = 15%

In the above scenario, what is the new trading profit in each case? Am i right to assume the following:

Month 1: New Trading Profit = 10%
Month 2: New Trading Profit = 0%
Month 3: New Trading Profit = 5%


If that is the case, isn't it very unfair for the investors but advantageous for the manager? See below

Month 1: Current Return = 50%
Month 2: Current Return = 500%
Month 3: Current Return = 1%

The investors have to compensate the manager for the massive profit in month 2 but the manage lost most of the profits in month 3. So the 2nd month compensation is for nothing.

I've always thought compensation is charged on an annual basis, instead of monthly

Anyone knows this?

 

[dabao91]

What is defined by New Trading Profit? --- Positive P/L in the month in question.


Take the following as an eg.

Month 1: Current Return = 10% <--------- NTP = 10%
Month 2: Current Return = 5% <----------- NTP = 0%
Month 3: Current Return = 15% <----------- N TP = ((115/110) – 1) * 100%

In the above scenario, what is the new trading profit in each case? Am i right to assume the following:

Month 1: New Trading Profit = 10%
Month 2: New Trading Profit = 0%
Month 3: New Trading Profit = 5% <---------- No not 5%, see above.


If that is the case, isn't it very unfair for the investors but advantageous for the manager? See below

Month 1: Current Return = 50%
Month 2: Current Return = 500%
Month 3: Current Return = 1%

The investors have to compensate the manager for the massive profit in month 2 but the manage lost most of the profits in month 3. So the 2nd month compensation is for nothing. <----------- Well the issue remains even base on 2/20 (vs. 0/30). You can argue that for 2/20, even investor loses, he still pays 2%. In you case, since the carry forward loss is a big negative, so the advisor needs to make it up before he can earn any incentive fee. So the 2nd month compensation is not necessary for nothing. 0/30 option is intended to solve the case even investor lose but still have to pay 2% management fees. 0/30 can not solve the case you cited. But the number (500%; 1%) is too extreme.

I've always thought compensation is charged on an annual basis, instead of monthly <----------- Since NFA/CFTC regulations, performance must be base on monthly. So most if not all, incentive fees are based on monthly not year (or quarter) for CTA/CPO.

If 2/20 or 0/30 is not that good, any suggestions you may have?