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A hedge fund established in Luxembourg or abroad will typically remunerate the investment manager by way of either:

  • a management fee: a percentage of the gross NAV of the fund, often in a range of 1% to 5% per year; or

  • a performance fee: a percentage of the fund's NAV increase, often in a range of 10 to 50%

 

Sometimes, the latter is subject to a 'high water mark' which is a limit under which, if the fund achieves a negative performance, the manager will not be rewarded for its performance until he has recovered his loss.

In certain cases, the high water mark can be reset, and, depending on the entry point of each investor, there may be two different techniques to keep all investors on the same level in regards to remuneration of the manager’s performance. These are:

  • establishment of a series of shares: for each NAV the administrator calculates a new share price for each new share issued depending on its own high water mark

  • deduction or addition of shares: when a high water mark is reset, the administrator will calculate a number of shares to be deducted or added to each investors’ portfolio and compensated by the manager

 

The industry generally refers to a “2/20” when speaking about a fund with a management fee of 2% on the asset under management and 20% of performance fee with a high water mark.

Performance fees can be subject to :

  • a hurdle rate: the performance fee is only paid if the increase in the NAV is in excess of a benchmark rate such as LIBOR, or simply a fixed rate.

  • another condition

 

Some hedge funds may charge investors a subscription fee or a redemption fee for withdrawals during a given period of time.

 

Further Information :

How to calculate a Net Asset Value per Share (NAV) ?

 

Read also:

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