Understanding Hedge Fund Fees: Implications for Hedge Fund Managers
K&L GATES
WHOOPS!
The proposal is that those investors who agree to restructure
have the benefit of a 5% cumulative Hard Hurdle Rate for 2
years. However, the HWM is defined in the standard manner.
In the first 2 years, the new fund invests so that the HWM
does not move up. As the "good investor" who has stayed in
the new fund for 2 lean years approaches the end of Year
Two, he/she is punished for staying in by giving up the
benefit of the 10% cumulative Hard Hurdle.
Year One and Year Two: as the HWM will not have increased,
the investor will pay an Incentive Fee on $1 of profit. Should
the HWM have increased by the Hard Hurdle even though
there were no profits (the same analysis would apply to a Soft
Hurdle, but it would not be an HWM increase of 10 (but a
"carryover" by the Preferred Return of 10 which would have
been created).
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