Structure of HF Performance fees and Management fees

Discussion in 'Professional Trading' started by laurentc, Oct 5, 2006.

  1. laurentc



    My question is about how the fee structure of fees is seen by the Fund of funds and the 3PM?

    What do you think of a fund that has a 0% Man Fee and 30% Perf Fee?

    Would you see it as a "fair fund", because it is dedicated to get good performance, with managers earning money ONLY if they do their job well?

    Or do you think that the standard fee structure (1.5-2% and 15-20%) is better?

    What about the marketing of this fund?
    Do you think it is easier to market such a fund without management fee?

  2. From a customer's perspective it's like a girl that sleeps with you on the first night . . . it may make you look desparate.
  3. I strongly disagree. Many of the best and brightest are moving to a "naught-30" structure. Some established managers are floating new funds with 0/30. They've banked an order of mag in perf fees // mgmt fees. They can afford to absorb the operational expenses.
  4. Yeah but ten percent can make a significant difference in your return.

    I would rather risk the chance of a two percent mgt fee.

    Sure if I was running a HF, I would luv an extra ten percent
  5. With bigger incentive fees, you want to be sure that you're not investing with people who are willing to get reckless and "swing for the fences right away" and be willing to sacrifice their investors' money in the process if things don't go well. If wealthy people lose money that way, it won't matter because nobody will feel any sympathy for them. Investors could demand that fund-operators invest a "substantial" amount of their own money in a fund as a means of avoiding a meltdown.
  6. 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.
  7. I've invested with a manager who offers clients a choice: either 2-and-20, or 0-and-25. I didn't see it as an act of desperation.
  8. The breakeven gross annual return between 2/20 and 0/25 is 38.1%. So, unless that manager is near the very top of the HF performance rankings of all time, it's a no-brainer for the investor: go with 0/25.
  9. Exactly. Ultimately you end up like Jim Simons' Medallion Fund (5/44 fees), with no outside investors at all. :p

  10. No way
    #10     Oct 5, 2006