rebecca jacques, associate director 2006 comprehending issues that may arise from instigating...

Rebecca Jacques, Associate Director

2006

Comprehending issues that may arise from instigating performance based fees.

Member of

http://www.vertexcapital.com.au/

2

Issues that may arise with Performance based Fees.


Issues – Performance based Fees

• What is a Performance based Fee?

• Pricing Traditional vs Alternative Asset Management Services.

2006 © Vertex Capital Management Ltd. 3


Performance Based Fees

Agency Theory – Investors should compensate the Portfolio Managers through incentive contracts in order to align their respective interests.


“If my investment has lost money, then why is the fund manager

getting paid bonuses?”


Performance Based Fees

• The 1st hedge fund was formed in 1949.• Long-short equity positions

• Leverage

• Incentive fee based on performance

• Private Investment Vehicles• Limited partnerships

• Managers are co-investors

• Wealthy individuals or Institutional investors



Establishing a Hedge Fund




Establishing Different Ways to set-up Calculations.


Which Structure?


Off-shore Domestic

Limited Liability Wholesale Retail



Learning Different Ways to Measure.


Equalisation


Investor # of Shares NAV per share Performance Adjustment

Total Value of Investment

A 10,000.000000 $95.00 $0.00 $950,000.00 B 9,090.909000 $95.00 $0.00 $863,636.36 C 10,526.315789 $95.00 $0.00 $1,000,000.00

Year 1, June 30

Performance fee rate: 20%

Performance fee period: Annually.

Investor Date Subscription Amount

GAV NAV # of Shares

A Jan 1 $1,000,000.00 $100.00 $100.00 10,000 B Mar 31 $1,000,000.00 $110.00 $108.00 9,090.90909 C Jun 30 $1,000,000.00 $95.00 $95.00 10,526.315789



Equalisation

Investor # of Shares NAV per share Performance Adjustment

Total Value of Investment

A 10,000.000000 $110.00 $0.00 $1,100,000.00 B 9,090.909090 $110.00 $18,181.82 $1,018,181.82 C 10,526.315789 $100.00 ($10,526.32) $1,147,368.42

Year 1, Dec 31



High Water Marks & Hurdle Rates


High Water Marks

•Difference between a High Water Mark and a Hurdle Rate?

• One Year loss carry Forward Model



Vertex Capital Management LimitedACN 078 615 835

AFS Licence No: 245482

Exchange CentreLevel 12, 20 Bridge Street

Sydney, NSW, 2000 AustraliaPhone +61 2 9251 1877 Fax +61 2 9241 4122

E-mail: [email protected]: www.vertexcapital.com.au



rebecca jacques, associate director 2006 comprehending issues that may arise from instigating...

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