Understanding Hedge Fund Fees: Implications for Hedge Fund Managers
K&L GATES
PERFORMANCE FEE REVERSAL EXAMPLE
Share issued at $100
Increases to $110
New Share issued at $108 ($110 minus the $2 accrued Performance Fee)
Loss of $20
Fund capital
•
$110 plus $108=$218
.
$218 minus $20-$198
.
NAV per Share=$99
The Share issued at $108 has lost $9; the Share issued at $100 but which rose to $110 has lost $11.
This is commonly referred to as the later issued Share "sharing in the Performance Fee reversal." What
is really happening is that the later issued Share is being permitted to buy into the same pro rata share
of the Fund's portfolio for a price reduced by a contingent liability (the accrued Performance Fee),
which, in fact, disappears. Alternatively, the situation can be described as the later-issued Shares
acquiring 50% of the risk of the Fund but only putting up $108 rather than $110.
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