performance fee

Discussion in 'Professional Trading' started by serg007, Jan 30, 2006.

  1. serg007

    serg007

    Just would like to ask more experienced people here- is that normal for fund managers and/or prop traders to look for performance fee based on the difference between actual fund/portfolio performance and some chosen benchmark?

    For example, if I made 12% in 2005 for the portfolio mainly comprised of US ETFs and stocks, vs. 3% S&P-500 performance, would it be normal to get performance fee, say 20%*(12%-3%)*portfolio size ?
    Or maybe 10% or 15% of this difference? Or to use another benchmark? Or only absolute performance is awarded in this business?

    Thanks in advance for replies.
     
  2. newbunch

    newbunch

    I wouldn't say it's normal, but it does exist. It's called a hurdle rate.
     
  3. With hedge funds you can pretty much set out any incentive fee formula that you wish as long as the investors agree to it, so an incentive fee based on outperformance can exist. However, for a prop shop where you are trading your own money using leverage, you are not getting any fees from anyone really. Unless I am misunderstanding the question.

     
  4. serg007

    serg007

    Thanks guys for replies

    Yes I know there is a thing called hurdle rate :) But it is very often a kind of money line like 3-month Libor. I have never met S&P-500 as hurdle rate, that's why I was asking...

    Regarding prop trading, it's a small misunderstanding here. Under prop trader I meant a person trading bank's or investment company's proprietary money (that's my situation today).