Hedge Funds

Fund appreciation rights would change hedge fund compensation

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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