NuclearPhynance Archive

I think that one might also consider your target investors. Family offices - for instance - might be much more interested in different structures than say other institutional investors.

> Family offices - for instance - might be much more interested in different structures than say other institutional investors.



Specifically with reference to Switzerland (where my company is located), in fact, I think that could be a path that may pay off.





Aside note: I appreciate that many of the best brains of the forum have chimed into this discussion to offer their valuable opinion. Thank you guys.

Fixed fee is a payment to hold the right to access the system.



Otherwise I would have all the problems in the world justifying fees to cover my monthly 800$ expenditures. Party

>Fixed fee is a payment to hold the right to access the system.



I will make a summary of all the various proposals/angles that each of you has brought to the discussion, and I'll post it in this thread, so we'll have a panoramic view of all the various ideas/opinions on each part of the fee pricing mechanism.

As promised, I am posting here a re-cap of all the contributions to this discussion, a sort of sum-up of everything we said so far:



*crystallization frequency is usually performed on a quarterly or annual basis; it’s hard to find a valid logic to trim the crystallization frequency to an interval that will balance well the manager and the investors interests: a high crystallization frequency usually favors the manager, while a low crystallization frequency usually favors the investors, as discussed in the paper linked at the start of this thread



* increasing crystallization frequency with the frequency of trading is a possible path, as long as risk-adjusted returns stay above the benchmark, otherwise is a "heads I win, tail you lose" scheme



* efforts to innovate the 2/20 typical fee structure may hurt the manager, institutional allocators may not like it, but it is becoming more common, as of lately, to hear 1.5/15 fee structures for new funds launching while the highest fees structure currently out there for established funds appears to be RenTec’s 5/44 (Medallion Fund)



* family offices may be more interested than institutional asset allocators in innovative fee structures; the same may apply also to private investors (U/HNWI)



* fixed management fee is seen by some as “operation costs” while others see it as a “entry ticket to access the manager’s talent”, however there is probably room to resize/review/adapt the fixed management fee as not all funds need/deserve to charge a 2% management fee to their clients; it would be actually good to find a method to quantify how much % a manager needs to charge to clients in fixed management fees



*according to some studies at Cass University, the most prevalent fee structure currently in the UK market (a fixed fee as a proportion of AUM) is generally the best structure for the manager and the worst for the investor so there is certainly room for improvement in the currently linear relationship between AUM and fixed management fee



*possible solutions to improve the fixed fee size could be to tie it to the funds yearly operating costs or to use some model to reduce the % charged as the AUM grows, or to offer progressively decreasing fixed fees through the years to clients that are staying for the long-term (a decreasing curve up to a certain point, then flat)



*some (very rare) funds may offer to pay back a part of the fixed management fee if the yearly profit target is not met



*on the incentive fees front: most funds charge a 20% profit fee, however some shops running managed accounts increase their profit fees when their Sharpe Ratio increase



*solutions to improve incentives fees: variable profit fees increasing with the size of returns, or otherwise charging a 50% fee only on the portion of the realized profits that beat the benchmark, or charging 100% of the returns above any performance => 50% on the selected crystallization frequency interval (e.g. yearly).

I'm a bit surprised [and I must confess annoyed] to read this stuff...



- is there a need for an academic paper to figure out that high crystallization frequency (better yet, instant) favours the manager while low one (better no one) favours the investor?



- Is it possible to refrain from mentioning billions, Rentec, Simons, Griffin, billions again etc... when discussing start ups?



- Wouldn't it be better to stop talking in hypothetically unbiased terms of "what is better for the investor?" given that everybody here is/want to be the investment manager and - bottom line - cares or would/will care exclusively about what is better for him which is not necessarily in the interests of the investors?









What do the investors prefer? Low fees, low frequency highwatermark, instant redemptions, no gates.



What does the IM prefer? High fees, high frequency crystallization (even better: no HWM), locked-in capital, long notice periods for redemptions, gates.



What should you do? Simple. Depending on which category you belong to and who is your counterparty in the other, go for what you can get away with (the other side will worry about protecting his own interest, I guarantee you that).



As IM 2+20 seems the obvious choice. I doubt lowering fees in the name of "a world more just and equal" will win you more business (but I'm pretty sure you will make less money). Higher fees I think will get you nowhere.



This is not exactly lion and gazelle shit but there are more analogies than one cares to admit (even if we are all busy pretending otherwise).

Not always true - not go for what can get away with - as (espeically in say the CTA space) there is an arguement / tactic for going for lower fees - in a hope to amass more assets

I think fees higher than 2+20 will make it impossible for a common mortal to raise assets (in absence of a well placed best friend at a FoF/Asset Manager and a lucrative retrocession scheme). Differently from you I do not think that lower fees will help you raise more assets, certainly not in an FV ratio - i.e. half the fees, double the AUM (I mean people that decide to invest with you if you charge them 1+15 would most likely have invested if you charged 2+20 anyway) and can be a serious impediment in running the business (for example I think that charging no man fee and a higher performance fee, while a well meaning decision, is a TERRIBLE business decision for a fund manager).



The rest, no offence but - giving money back to investors, calculating fees on billions when Bloomberg dedicates articles for launches of 5-10M funds, discussing University papers that can only be relevant for an unbiased academic and not for practitioners with skin in the game etc.. - to me smacks a bit of a theological medieval debate....

> I mean people that decide to invest with you if you charge them 1+15 would most likely have invested if you charged 2+20 anyway



Nobody argues with that.

What I am arguing with is that the industry uses a generic 2+20 one-size-fits-all but if I am an investor and I have to pay you a 20% fee during a year where you made me only a 2% return, I don't know about you, but I feel ripped off.



> to me smacks a bit of a theological medieval debate....



It's not theology, it's business. Can I improve my fee structure to attract investors in higher numbers and stay with me for longer terms? Is 2/20 the ideal formula to achieve that?



When I hear comments like "we have always done things like this, why change?", it reminds me of Kodak's comments about digital photography some years ago: "no one would ever want to look at their pictures on a video screen".



All this said I understand that probably 2/20 is the way to go when launching a new fund. Thanks for your comments.

>> it reminds me of Kodak's comments about digital photography some years ago: "no one would ever want to look at their pictures on a video screen".



People saying stupid shit all the time. I don't think this can be an anchor/starting point for anything.