Understanding Hedge Fund Fees: Implications for Hedge Fund Managers
K&L GATES
EQUALIZATION ACCOUNTING
Equalization is monthly series accounting except that a single series of Shares is maintained. As a
result, the accounting mechanism must "remember" the NAV at which all Shares are issued, so that
appropriate adjustments can be made so that, although all Shares have the same NAV per Share and,
accordingly, the same HWM and Performance Fee accrual (otherwise the Shares issued at different
times would have - at least potentially- different NAVs), no investor investing only once in the Fund
pays a Performance Fee greater than that which is due based on the investment experience of such
investor's own Shares.
Because maintaining a uniform NAV is the goal of equalization, equalization must confront the issues
of:
1.
accrued Performance Fees causing the NAV per Share to be less than the cash value per Share
at the date of a subscription; and
2. the necessarily uniform HWM per Share used to determine the uniform Performance Fee accrual,
per Share being materially different from the subscription price (which should be the HWM) of
new-issued Shares.
Equalization addresses clause (1) by requiring investors to invest not just the NAV per Share but the
Gross Asset Value per Share (the difference constituting the "Equalization Credit" or "Equalization
Deficit"). Equalization addresses clause (2) by redeeming Shares in the case of Shares issued below
the uniform HWM per Share in order to pay the Performance Fees due on these Shares.
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