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Alternative Market Briefing

Other Voices: The growing problem with performance fees

Friday, December 05, 2014

This white paper was authored by FundCalcs, an independent software provider based in Dublin, and Global Perspectives, an Irish consulting and research firm. It examines the trends since 2008 of hedge fund performance and incentive fees becoming more complex, and the challenge and risk this represents to the administration and valuation of alternative investment funds.

Introduction

Hedge funds’ performance fees are a key component of every fund’s Net Asset Valuation calculation. Since the economic crisis of 2008, hedge fund performance and incentive fees have become more complex. The standard "2 and 20" fee model is often not the case anymore.

This has meant calculations on many funds have become more challenging and complex. Many fund administrators and managers are having to calculate increasingly complicated performance fees on spreadsheets – a step backwards in terms of automation and efficiency.

A problem of complexity

The growth of more complex performance fees represent a significant area of risk in back office administration. Transfer agencies and fund manager operations departments are faced with tracking and computing more and more complicated incentive fee calculations. Ironically the most complex, bespoke fees are often calculated on spreadsheets, as they are likely to be unsupported by existing shareholder se......................

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