Fund appreciation rights would change hedge fund compensation
October 05, 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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