Performance Fees

[tokyo_trader]

Hi,

Is it possible to add/apply performance fees?

For example, in addition to say a flat 1% p.a. advisory/management fee, is it possible to add a 10% performance fee based on a high watermark? (Without having to calculate it manually that is)

With thanks

Scott

[Mark]

Hi Scott,

Sorry, no, this isn't currently a feature. How do you calculate a fee relative to a high watermark? Maybe this is something we can consider adding into a future version.

[tokyo_trader]

Hi Mark,

The high watermark (HWM) level is dependent on the billing period (how frequent the performance fee is calculated and deducted). This is typically quarterly or annually. Common performance fees are usually between 10% ~ 20%.

Our company in Japan charges our model portfolio clients a flat 1% annual portfolio management fee (charged quarterly based on the QTR end portfolio value). In addition we charge a 10% performance fee which is also calculated quarterly (only on gains above the previous HWM)..

Here is a rough example:

Lets say the portfolio value at Dec 31st is $100,000.
Now, at the end of the next quarter (March 31st) the value is $107,000.

This means a gain of $7000 (7%)
If you are charging a 10% performance fee, you would earn/deduct $700 from the account.

Once the fee has been deducted, the high watermark would be set to $106,300.

At the end of the next QTR, the value is $104,300 which is below the high watermark, hence no performance is charged.

At the next QTR end, the value is 109,300 (as gain of $3000 above the high watermark).
$300 performance is charged and the HWM is reset to $109,000

At the end of the next QTR, the value is $141,000. However, the client added $30,000 in new money during the QTR, so this has to be excluded from the calculation as follows:

$141,000 - 30,000 = $111,0000

$111,0000 - HWM $109,000 = $2000 gain (Client charged $200)

HWM reset to: $140,800 - Total value minus the $200 performance fee.

The same applies when a client withdraws money from the account during the period.
The withdrawal amount is deducted from the previous HWM in order to calculate any performance fees in the current quarter.

So the formula is fairly straight forward. The main points are the calculation period (monthly, quarterly or annually) and what performance fee % is charged. (Please note that monthly calculation of performance fees is very rare).
Also, new money added or money withdrawn has to be accounted for in order to correctly calculate the performance fee.

If this feature could be added to FM, and included in the fees reports section it would be fantastic and a real value add time saver for active advisers / managers.

Performance fees are becoming very popular for advisers and managers who actively manage clients money, so i think this would be a popular addition to FM. It would certainly save us from manually calculating it. It would also be great to have all the fees calculated and reported in the same software (i.e FM)... Right now we have to use different systems for different fees which is an admin nightmare.

If anything is not clear, please get back to me.

Kind regards

Scott

[Mark]

Hi Scott,

Thanks much for the excellent description of HWM performance fees. I believe I understand. I did have one case I wanted to confirm with you.

Let's say after Q1 you have a HWM of 95,000 and a market value of 100,000. During Q2 the client adds 30,000 and at the end of Q2 the market value is only 115,000. I would believe that there are no performance fees for Q2 since there was a loss, and the new HWM should be 125,000, which is the prior 95,000 HWM plus the 30,000 contribution. Is this correct?

Would you like to be able to see both the beginning and ending HWM on the Managemet Fee report? It seems that somewhere you should be able to view what FM is calculating as your HWM.

[tokyo_trader]

Hi Mark,

Yes your calculation is correct. $125,000 would be the new HWM for the end of Q2.

On the report, it would be useful to see the billing QTR HWM so the client can see how the performance fee (PF) was calculated (if any).
It would be good to also show them the HWM for the coming QTR.

One other point, we (our company) calculates the performance fee net of our advisory/portfolio management fee of 1% per year. This is the industry standard. Charging PF on a gross portfolio value is unethical.

Here is a quick example.

Q1 HWM = 100,000
Q2 portfolio value = $102,500

$102,500 x 0.25% = $256.25 (deducted as Q2 portfolio management fees).

Therefore:
Q2 net portfolio value = $102,243.75 - $100,000 (Q1 HWM) = Q2 gain of $2,243.75

$2,243.75 x 10% PF = $224.37 (deducted as performance fee)

Q3 HWM = $102,019.38 (net of all fess)

I hope the above calculation makes sense?

I really appreciate you taking the time to look into this.

Kind regards

Scott

[Mark]

Hi Scott,

Thanks for the additional clarification. That does make sense. I do agree this would be a nice improvement, and will look to add it as an option for the Management Fee report.

[Mark]

Hi Scott,

I'd appreciate hearing your thoughts on a possible "hurdle rate" option. I've been doing some research, and it seems common to also use a "hurdle rate". It appears that having an option to specify a hurdle rate either as a fixed percentage or from a user-selected benchmark would be a useful feature. Any thoughts on a hurdle rate option?

[tokyo_trader]

Hi Mark,

Sorry for the delay, I have been away from the office for the last 2 days.

In my experience, it is common to use a HWM or a hurdle rate. Yes I have seen some managers who use a hurdle rate combined with a HWM.

However, using a hurdle rate on it's own means the following unethical situation could arise...
For example: A manager decides to charge a PF of 10% based on gains over a 5% hurdle rate.
If the manager has a negative year of lets say 10% in 2010 (i.e no PF charged to his clients). Then in 2011 he makes 8%. This means a client would be charged 10% PF on the 3% over and above the 5% hurdle rate... Which is unethical in my opinion because the client is still down despite the 8% gain in 2011...

Of course it is not our responsibility to dictate what people charge their clients.

Using a stand alone HWM or a Hurdle Rate combined with a HWM is of course much more suitable that just a stand alone Hurdle Rate.

As for what to use as a hurdle rate; This largely depends on the style (risk) of portfolio the manager/adviser is managing. I have seen many different methods and benchmarks used, such as:

- LIBOR +3%
- 90 'T-Bill" + 1.5%
- S&P500
- Fixed % hurdle rates of 5%, 8% 10% etc, etc.

To keep things simple, it might be worthwhile allowing the user to input a fixed % if using a Hurdle Rate (HR). This figure could be manually updated each billing period (quarterly/annually) if the they are pegging it to a benchmark. Otherwise they can leave it at a fixed percentage.

So the FM users would need to specify their PF% to be charged, and whether it is based on:
- HWM
- HWM + HR
- HR

If using a HR, they would also need to specify the rate.

I suppose offering FM users the option of using either a HWM, HR or HWM combined with a HR will increase the programming required.

I hope the above helps? Please feel free to get back to me if you need any further clarification.

Kind regards

Scott

[Mark]

Hi Scott,

Thanks again for the help. I think to start with we'll shoot to support either HWM or HWM + HR, but not HR alone. If we receive feedback that advisors would like a hurdle rate by itself we can consider adding that in the future. For the hurdle rate specification I'm thinking of allowing the user to either enter a fixed %, or they can choose an investment, where that investment's return is the hurdle rate. It sounds like maybe we should support an optional adder to the investment's return, so you could for example have an investment to track LIBOR, and then add 3% to the LIBOR investment's return.

[tokyo_trader]

Hi Mark,

If you can add HWM (and HWM + HR) performance fees to the reports within FM, I for one will be very grateful.

Please feel free to contact me if you need any further clarifications.

Kind regards

Scott

[larssan]

Hi,

I'm currently searching and deciding for a portfolio manager software and be able to use HWM performance fee would make that decision easy.

Is this a feature that will be implemented ?

Regards, Lars

[Mark]

Hi Lars,

I can confirm this feature will be in the next major update (v12). It has already been completed/added to the program. Management fees (including Performance Fees) are a feature only available in the Advisor version.

[tokyo_trader]

Hi,

I'm currently searching and deciding for a portfolio manager software and be able to use HWM performance fee would make that decision easy.

Is this a feature that will be implemented ?

Regards, Lars

Hi Lars,

In the past, I too was searching for a suitable platform for portfolio management. I spent weeks searching and testing different options.. I found there is no one platform that is great at everything, but Fund Manager was for me the best and most flexible option.

What I like the most about Fund Manager (apart from the actual software, which is very good) is the level of support you receive.

Also, I requested that a performance fee option be added to the management fee options within FM and Mark from support looked at it and agreed it would add value to the software..

Not sure if my comments help, but I just wanted to let you know I understand how time consuming and frustrating it can be to search for a suitable platform and the time it takes to test.

Good luck

Scott

[larssan]

Thank you for the info. FM sure looks good.

What I'm basically looking for is a software where I can manage multiple clients accounts and in the same time minimizing the manual data entry.

Preferably I would like to enter trades data at a single place and that data is then distrubuted to each client account based on initial deposit, risk factor etc.


Regards, Lars

[tokyo_trader]

Thank you for the info. FM sure looks good.

What I'm basically looking for is a software where I can manage multiple clients accounts and in the same time minimizing the manual data entry.

Preferably I would like to enter trades data at a single place and that data is then distrubuted to each client account based on initial deposit, risk factor etc.


Regards, Lars

Hi Lars,

Based on what you said above, FM advisor edition should be perfect.
Of course, it will take some time to learn the software and how to set up and configure the data downloads and client portfolios. Once you get used to the software, it will do almost any task required by a portfolio / asset manager.

Scott