Lesson 5 of 10 · All lessons in this module
  1. Why appraisal is harder: the life cycle and the J-curveVideo lesson
  2. Measuring returns: IRR versus MOICVideo lesson
  3. Leverage: magnifying gains and losses
  4. Valuation: fair value levels and smoothed returns
  5. Fees, custom terms and redemption provisions
  6. Hurdle rates, catch-up, waterfalls and clawbackVideo lesson
  7. High-water marks, investor timing and either/or feesVideo lesson
  8. Integrated case: hurdle rate and high-water mark in one fee
  9. Integrated case: three investors, one fund, four years
  10. Funds of funds, benchmarks and index biases

Lesson 5 of 10 · 14 min

Fees, custom terms and redemption provisions

Alternative funds charge a management fee plus a performance fee, with terms that vary by investor; the order in which fees are calculated changes the net return.

In short

  • Management fee on AUM plus a performance (incentive) fee on gains, for example '2 and 20'.
  • GP income: RGP=P1rm+max⁡[0,(P1−P0)p]R_{GP} = P_1 r_m + \max[0, (P_1 - P_0)p]; investor return ri=(P1−P0−RGP)/P0r_i = (P_1 - P_0 - R_{GP})/P_0.
  • Charging the performance fee net of the management fee lowers total fees and raises the investor's return.
  • Custom terms: lower fees for longer lockups or larger tickets, founders shares for early investors, and either/or fees.
  • Liquidity tools: redemption fees, notice periods, lockup periods and gates.
  • Databases report returns net of aggregate fees, so an individual investor's net return can differ from the quoted figure.

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