2|7 For concentrated, best-idea LO portfolios, there should never be performance fees on absolute returns, only on excess returns.
3|7 This is fee efficient vs. L/S equity managers. some of whom may run big market exposures while charging performance fees on absolute returns.
Generating 9% returns running a 60% long L/S portfolio with the market is up 15% is not performance-fee worthy.
Generating 9% returns running a 60% long L/S portfolio with the market is up 15% is not performance-fee worthy.
4|7 But even in the LO space, a 0% and 30% (on excess) can be sometimes be more costly to the investor than 1% on 15% (on excess), over time.
If excess returns are over ~7%, 1 and 15% (on excess) is better for the investor.
If excess returns are over ~7%, 1 and 15% (on excess) is better for the investor.
5|7 And I get the argument about avoiding all fees during down periods, but I would also say that 0% management fees can potentially lead to excess risk-taking for smaller/newer asset LO managers who have bills to pay.
Ignoring this leads us toward asset gatherers.
Ignoring this leads us toward asset gatherers.
6|7 But I like either of them (0/1 and 30/15 on excess) vs. a 1% and 20% (or lower) structure that pays performance fees on absolute, rather than excess, returns.
Performance fees should only be on excess returns over a beta or market-adjusted bench.
Performance fees should only be on excess returns over a beta or market-adjusted bench.
7|7 If the L/S manager is running 50% long, then performance fees should only be on excess returns over 50% of the benchmark return.
If returns are below that benchmark, there should be a HWM for the manager to surpass the following year before collecting any performance fees.
If returns are below that benchmark, there should be a HWM for the manager to surpass the following year before collecting any performance fees.
