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APerformance TuningIs a snapshot thatInvestment FundMay be charged byInvestment ManagerThat manages itsAssets, Calculated by reference to the increase in the Fund'sNet asset value(Or "nav"), which represents the value of the Fund'sInvestments. Performance fees are widely used by the investors managersHedge funds, Which typically charge a performance limit of 20% of the increase in the nav of the Fund.

Contents [Hide] 1 worked example 2 high water marks 3 Hurdles 4 other fees 5 terminology

[ Edit] Worked example

An example might be as follows:InvestorSubscribesSharesWorth $1,000,000 in a hedge fund. over the next year the nav of the fund increases by 10%, making the investor's shares worth $1,100,000. of the $100,000 increase, 20% (I. e. $20,000) will be paid to the investors manager, thereby cing the nav of the Fund by that amount and leaving the investors or with shares worth $1,080,000, giving a return of 8% before deduction of any other fees.

[ Edit] High water marks

The highest nav of a fund to date is known as the "high water mark ". if the nav of a fund declines during a year, no performance limit will be payable to the investors manager. if the nav subsequently increases over the following year back to the high water mark (but no higher ), it wocould be objectionable for the investor to be charged a performance variable on that increase because the investor has not yet made any return on its investment. therefore, to address this concern, hedge funds will typically only charge a performance evaluation on increases in NAV over the high water mark.

[ Edit] Hurdles

A hurdle, in the context of a performance evaluation, is a levelReturnThat the fund must beat before it can charge a performance variable. It may be a set percentage or it may be referenced toIndex. The index wocould typically be eitherLibor(Or an equivalent) or an index reflecting the underlyingMarketIn which the Fund is investing. The purpose of the latter is to reward the Fund for generating returns that are better than the market (Alpha) Rather than for returns generated simply by movement in the market as a whole.

If, in the worked example, there had been a hurdle of 4%, the performance limit wocould only have been charged on the additional 6% increase rather than the full 10% increase in Nav.

As hurdles reduce the size of performance fees and reward successful active management, they are popular with investors. however, as demand for hedge funds has been high in recent years, fewer hedge funds have needed to resort to their use to attract investors.

[ Edit] Other fees

As well as a performance score, a hedge fund will charge a management limit, typically calculated as 2% of the nav of the fund, regardless of whether the Fund has generated any returns for the investor. hedge funds may also pay fees to administrators,Prime brokers,Lawyers,AccountantsAnd other service providers.

[ Edit] Terminology

While this article uses the term "nav" for simplicity, in reality a performance limit wocould be charged by reference to the navPer share(Being the net asset value divided by the number of shares in issue ). the nav will fluctuate as investors subscribe for and redeem shares, whereas the nav per share will only fluctuate as the underlying investments increase or decrease in value, making the latter the appropriate measure for calculating a performance variable.

Where a hedge fund is structured asLimited PartnershipOrUnit Trust, The terms "interest" and "unit" shocould be substituted for "share ".

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