Question for Performance Fee

[coolspot]

Hi Mark,

We currently have a portfolio with 0% management fee and 25% performance fee. The fee is paid separately (not deducted from portfolio).

fms.png (9.27 KiB) Viewed 4201 times

Period 0 1 2 3 4
Managed 20,000 22,176 22,299 22,493 27,479
End HWM 20,000 21,632 22,132 22,403 26,210
Fee 544 167 90 1,269

Total Fee (0-4): 2,070

I have simulate this in excel and the number tally with FMS output. I notice that for the calculation of HWM each period, the way it was calculated is to get the value and reduced it by the fee of the period.

I am still trying to understand why the fee of the period will decrease the HWM. This will make sense if the fee is deducted from the portfolio, so it will have similar effect with addition, or withdrawing of the capital.

Since this is 0% mgmt fee and 25%, the calculation should be straight forward. At the end 4 periods, the cumulative fee should be 25% x (27,479 - 20,000) = 1,870. FMS calculation is 2,070. I suspect that this is caused by the deduction of the fee from HWM.

If my thinking is right, then shouldnt the HWM reduced only when the fee is taken from the portfolio?

Thanks. Looking fwd for some answers.

[Mark]

Hi coolspot,

Are you sure you haven’t withdrawn money from the portfolio? You can create an Investment Transaction report with the filter option to only show portfolio external contributions and withdrawals to verify. I’m out of the office this week, but I will try to reproduce this when I return.

[coolspot]

Hi Mark,

Yes. I am quite sure. That is why the "managed value" is still above the HWM. And the difference, i found, is always equal to the fee at that period.

Thanks!

[Mark]

Hi coolspot,

Okay. I’m out of the office until Friday, but when I return I’ll try to reproduce this and get back to you.

[Mark]

Hi coolspot,

I've had a chance to look into this, and yes, the HWM is calculated assuming you will be paying these fees from the account, and not separately. You can also verify the details in a Management Fee report using "Help / Logs / Report Calculation...". You'll see a line something like this:

HWM ending 3/31/2022 is 10,750.00 (End Value (11,000.00) - Fixed fee (0.00) - Performance Fee (250.00))

If this is an important feature for you, we can look at getting you a test version with an option added to not make this assumption.

[coolspot]

Hi Mark,

So my understanding is this:
If the initial number is 100, and it become 200 at the end of the period, using 20% performance fee, the ending managed value will be 200, with HWM of 180. The way to understand this is, the managed value should be 180, but because the fee was not taken out, it is equivalent to a deposit of 20? So the 20 will be new money added to the portfolio.

If this is the case, I can compensate this by taking out the fee (transfering out the money).

Can I confirm that the best way to do this is:
- "Sell" cash for the amount of the last quarter fee on the 1st of next month? So for Q1 fee, I will take the fee on the 1st of April?
- Am I correct to say that whenever Investor wants to withdraw cash, "sell" should always be used for cash account? If that is the case, is there instance when "distribution" is used for cash account?

Thanks,
Chris

[Mark]

Hi Chris,

You could create a new investment called "Management Fees" or something. Add this to the client's portfolio and when they pay the fee record both:

1) Buy of $X for X shares and a price of $1
2) Reinvested Account Fee for -$X and -X shares and a price of $1

This investment will maintain a $0 balance, but keep track of their paid fees. This really is what is happening.

If you don't want to track this at all, we have added a new option for the next release (2022.17.3):

Added a new option for a management fee method using the "% of Ending Value Plus Performance" method: Calculate HWM Assuming Fees Paid Externally. Determines whether fees are deducted from the High Water Mark (HWM) or not.

If you'd like a pre-release of this version, please send me an email.

[coolspot]

Hi Mark

Your suggested method is a better workaround. That will work!

Looking forward for the next release.

Thanks!
Chris

[coolspot]

Hi Mark,

Going back to this issue.

You could create a new investment called "Management Fees" or something. Add this to the client's portfolio and when they pay the fee record both:

1) Buy of $X for X shares and a price of $1
2) Reinvested Account Fee for -$X and -X shares and a price of $1

This investment will maintain a $0 balance, but keep track of their paid fees. This really is what is happening.

I am following the method and the output is confusing me. I did what you suggested and put the date on the 1st April (the first day after the end of the previous period)

fms1.png (10.47 KiB) Viewed 3796 times

The beginning HWM and fees are same with my manual calculation. However, the managed value does not tally up, and surprisingly, when I opened the total portfolio value, the number tally with manual managed value calculation. I thought the "Managed Value" is always the same with the "Portfolio Value"

Just to make sure my understanding is correct:
This is a solution when we take the fees from the account. The "Management Fees" Account is withdrawing cash, however it is surpressing the portfolio value by having negative value equal to the fee. At the end of the period, this will ensure that the portfolio value is reduced by the fee (from previous period) withdrawn.

If this is correct, then the "Portfolio Value" is showing the right number since the cash is withdrawn from the portfolio. However, I still cant figure out why the "Managed Value" is different with the "Portfolio Value". (The differential is equal to the fee from previous period).

fms2.png (5.54 KiB) Viewed 3796 times

fms3.png (14.73 KiB) Viewed 3796 times

[Mark]

Hi coolspot,

The "Managed Value" could be different because of a negative valued investment, plus having on the option:

Options / Report Preferences... / Management Fees / Use Absolute Value of Short Positions for Managed Value Calculations

I'm guessing when you recorded the Buy into this "Management Fees" investment, it substracted the funds from a default cash account, which now has a negative value equal to the amount of this buy transaction. If the fees were paid externally (not subtracted from a cash account in the account), delete the cash side of this transaction. You can verify if you have a default cash account assigned under the "Properties..." of the sub-portfolio. To understand better how to deal with default cash, see our tutorial on tracking cash.