How often can a hedge fund take its performance fee?
Advanced · Video 12 of 16 · 0:48 ·
As often as the documents say: this is called crystallization. Most funds take it once a year; some quarterly or monthly. It matters when returns bounce. If $100,000 gains $10,000 by June and then loses $5,000 by December, a yearly fee is 20% of the year's $5,000, or $1,000. With a June and a December fee, June's fee is 20% of $10,000, $2,000, and it isn't paid back when December falls. More frequent crystallization favors the manager, so investors read that term closely.
Everything here is for educational purposes only and is not legal, tax or investment advice, or an offer to buy or sell any security. Laws and thresholds change and depend on your facts, so talk to a qualified attorney before acting.
Key facts
- Crystallization is when the performance fee is calculated and locked in.
- Yearly crystallization is common; some funds use quarterly or monthly.
- Fees already taken aren't returned if gains later reverse; a high-water mark only stops new fees.
- Example: yearly fee $1,000 vs semiannual fees $2,000 on the same returns.
Transcript
Operator: Same fund, same 20% fee, same returns. One manager gets paid twice as much. The difference is how often.
Founder: How often what?
Operator: How often the performance fee is locked in. It's called crystallization. Most funds do it once a year. Some do it every quarter, or every month.
Founder: Isn't it the same money either way?
Operator: Not when returns bounce. Say $100,000 gains $10,000 by June, then loses $5,000 by December.
Operator: Once a year: the fee is on what the year actually made, $5,000. That's $1,000.
Operator: Twice a year: June's fee is on $10,000. That's $2,000, and it isn't paid back when December drops.
Founder: So more often is better for me.
Operator: And worse for investors. That's why yearly is common, and why investors read this line closely.
Founder: So same fund, same fee...