Fund appreciation rights would change hedge fund compensation
Mon Oct 5, 2009
FARs offer a new way of calculating performance fees.
Investors have a new tool in their arsenal that could change
the way hedge fund managers are compensated. Fund appreciation
rights-which serve a function similar to stock options-help
investors ensure that managers' interests are aligned with
their own by restructuring and delaying payment of performance
fees. For some industry participants, it's a win-win situation,
though others are more skeptical.
Hedge fund investors have traditionally agreed to a 2-and-20
fee structure, whereby fund managers receive a management fee
of 2% of total assets and 20% of any gains made on that money
at the end of each year. FARs offer a new way of calculating
performance fees. Instead of paying managers 20% of total gains
on an annual basis, fund managers take all of the gains on 20%
of an investors' allocation, paid only after a predetermined
period of three years or more.
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