Fee Structure Impact Analysis

Impact of Fund-Level vs. Investor-Level Management Fees on Distributions Management fees directly affect the distributable cash flow (DCF) to investors, reducing the total amount available for distributions. The impact varies based on whether the fees are charged at the fund level or investor level. 1️⃣ Fund-Level Management Fee Impact on Distributions 🔹 Deducted from fund cash flows before calculating distributions. 🔹 Reduces NAV, affecting overall investor payouts. 🔹 Applied uniformly across all investors, impacting total distributable amounts. ✅ Example: Total committed capital = $500M Fund profits before fees = $100M Management fee (2% of committed capital) = $10M per year Net distributable profit after fees = $90M Distribution Waterfall: GP takes Carried Interest (20%) = $18M Remaining $72M is distributed among LPs based on commitment % 📌 Impact: ✔ Reduces distributable returns for all investors equally. ✔ Affects NAV calculations, influencing performance-based distributions. 2️⃣ Investor-Level Management Fee Impact on Distributions 🔹 Charged directly to each investor’s capital account based on deployed capital. 🔹 Distributions are reduced per investor, not at the fund level. 🔹 More variability in individual investor returns. ✅ Example: Investor A’s committed capital = $100M, drawn $50M Investor B’s committed capital = $50M, drawn $30M Fee Rate = 1.5% on drawn capital Investor A pays $750K/year, Investor B pays $450K/year Distribution Calculation (Assume $10M profit to distribute): Investor A’s share = (50M/80M) × $10M = $6.25M Investor B’s share = (30M/80M) × $10M = $3.75M After deducting individual fees: Investor A receives $5.5M ($6.25M - $750K) Investor B receives $3.3M ($3.75M - $450K) 📌 Impact: ✔ Individualized fee deductions affect investor distributions differently. ✔ Some investors may receive higher net distributions if they deploy less capital. ✔ More administrative complexity in fee tracking. Key Takeaways ✅ Fund-Level Fees reduce NAV and impact all LPs equally. ✅ Investor-Level Fees vary per investor, creating distribution disparities. ✅ Fund managers must balance fee structures to ensure fair returns. #PrivateEquity #FundAccounting #ManagementFees #NAVImpact #DistributionWaterfall #InvestmentFunds #GPvsLP #WealthManagement #AlternativeInvestments #FinanceInsights

📣 Emerging Fee Structures Challenge Traditional '2 and 20' Model in Hedge Fund Industry In a move that defies the broader industry trend towards cost reduction, some key players in the hedge fund space are introducing new types of fees. The traditional '2 and 20' fee structure is undergoing a transformation, with the introduction of 'pass-through' and 'compensation' fees to make up for revenue shortfalls. 🔑 Key Point: The "pass-through" model is enabling multi-strategy funds to hire aggressively. Interestingly, this can sometimes elevate the effective management fee to as high as 6/7%, a significant departure from the conventional 2%. 📈 These new fees are designed to cover operational expenses, including the crucial task of hiring and retaining top-tier talent. 📉 The backdrop to these changes is a challenging environment for hedge funds, marked by a decline in new launches and average returns that lag behind broader market indices. 🤔 The introduction of these new fees is a double-edged sword. While they may help funds cover operational costs and retain talent, they also place an additional burden on investors, particularly when these fees are levied regardless of fund performance. 👀 Investors must scrutinise the value they receive in return for these additional fees. If the returns don't justify the higher costs, a shift in capital allocation could be on the horizon. With the top multi-strategy groups closed to any new outside capital, we've seen a rapid rise of multi-strategy competitors where this additional capital has gone. For more details, read the full article below. #quanttrading #quant #portfoliomanagement #hedgefunds #quantitativeresearch #financialmarkets #quantitativefinance #feestructure #capitalallocation https://lnkd.in/erufpP2A

*Analysis of option-like fund performance fees in asset management via Monte Carlo actuarial distortion pricing* by Gareth W. Peters, Mantana Chudtong, and Andrea De Gaetano - just published in the Annals of Actuarial Science (link to full text in the comments). While fund fees are considered as a cost of capital for investors, the structuring of such fee mechanisms can also influence a fund manager’s decisions and investment strategy, thereby also impacting investment performance. The authors undertake a detailed analysis of management and performance fees for asset managers and investment funds. The study allows for an assessment of the effect of fee structures and the potential for asymmetric incentives to arise that may promote adverse risk-taking behaviours by the fund manager, to the detriment of investors or retirees. As such, understanding the mechanism of fee charging as well as pricing the fees correctly is vital. An exploration of the application of actuarial distortion pricing methods for complete and incomplete market valuation is performed on a variety of path-dependent option-like performance fee structures for various funds in the European and American markets. Furthermore, several scenario analysis and sensitivity studies are undertaken. The class of Net Asset Value models adopted are Lévy processes, and the pricing is performed via Monte Carlo techniques. #actuarialscience #research #investment #fund #fees #retirement #options 

We think that it is important for #investment platforms to help consumers understand the implication of their fees... Sometimes, investment costs are a combination of % fees and flat £ fees. This can make it harder to work out the true cost of investing. This fee calculator from Wahed does the maths for customers (link in the comments). Whatever fee structure is used, there will be distributional consequences. Some consumers will enjoy better value than others. As flagged by Harry Ashton yesterday, the use of a flat £ fee means that customers with low balances could end up paying a higher proportion of their investment in fees. Good fair value assessments identify any pockets of customers getting poor value. This analysis guides firms in ensuring that all customers are getting good outcomes from their investment products. For example, this might include having robust controls to ensure that only those customers in the target market are able to invest. #consumerduty #behavioraleconomics