I was genuinely surprised to uncover the intricate details involved in the 2 and 20 compensation model for hedge funds. It's fascinating to learn about the various configurations possible within this framework. The model outlined here incorporates the concept of a soft hurdle, which resets annually, and provides for the possibility of both an asset management fee and a soft hurdle option. Crafting these provisions into a legal operating agreement proves to be a complex task, emphasizing the value of a simplified model to effectively communicate these concepts to investors.
$75.00 USD
After purchase, this template will be immediately available to download. It is also included in the joint venture template bundle and The Super Smart Bundle.
Template Features:
- Simulate up to 15 Years (easily expandable, just drag down bottom row).
- Soft Hurdle logic (performance fee applied to entire gain, if gain exceeds hurdle for period)
- Hurdle resets each year (not cumulative or compounded).
- High watermark is in effect.
- Option for an asset management fee (applies to beginning NAV each period) and happens no matter what the performance is. This fee is reduced from any gains/losses for the period, before the actual measurement of the gain/loss that is subject to the performance fee.
- The performance fee is set in a way so the fee can only be calculated against any increases from the most recent high watermark. This ensures the performance fee doesn't reduce the ending NAV to something below the high watermark and so performance fees are not paid for recovery of previous period losses.
- The gain or loss is measured from the previous periods ending NAV to the ending NAV after management fees (but before performance fees) of the next period.
- 8 Visualizations
- This model was vetted by a practicing hedge fund attorney.
- Fully editable and unlocked.
About the Starting High Watermark:
The term "starting high watermark" is commonly used in the context of investment funds, particularly hedge funds, to refer to a benchmark level that the fund's net asset value (NAV) must exceed for the fund managers to receive performance fees. The "high watermark" concept ensures that fund managers are rewarded for positive performance over time, rather than for recovering from previous losses.
The "starting high watermark" can be considered the initial NAV at the point where the investment agreement begins, or it can be set at a certain level agreed upon by the fund and its investors. This means if the agreement specifies that the starting high watermark is the initial NAV deposited, then yes, it refers to the NAV at the time the investment is made. This ensures that the manager only receives performance fees on new profits made above this initial level, protecting investors from paying fees for performance that simply recovers previous losses.
However, the specific definition and application can vary depending on the terms set by the investment fund. It's important to review the specific fund documents or agreement to understand how the starting high watermark is defined and applied in that context.
What Can You do With This Template?
The main purpose of this model is to help demonstrate to investors how the hedge fund fees are calculated under various changes to the investors NAV over time. The light yellow cells can be changed to any figure and the resulting fees will update. This makes it easier to understand how things work "under the hood" and can help investors feel more comfortable about what they will pay in fees to the hedge fund over time.
This is not the only way to structure your hedge fund fees, obviously, but it is one way. Other options include using a hard hurdle and/or a cumulative hurdle. Both of which are different than the above. In reality, the fee structure can work however the two parties agree on it to work, but having a model to understand the agreement is beneficial.
Visualizations Included:
To help make the model even more digestible, I included 8 visualizations that shows things like total fees over time vs total NAV and cumulative gain/losses from initial deposit. Additionally, there was a big focus on the high watermark vs fees earned.
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