Why can a fund earn a positive return but charge no performance fee?
I saw an example where the investor return was positive for the year, but the manager did not collect an incentive fee. How is that possible?
A positive one-year return does not automatically mean the fund exceeded its prior high-water mark. The high-water mark looks back to the previous peak value, not just the current year's beginning value.
Suppose a fund begins the year at USD 90 million, has a prior high-water mark of USD 105 million, and ends at USD 101 million before fees. If a 2 percent management fee on year-end assets reduces the value to USD 98.98 million, the investor still earned 9.98 percent for the year. But the performance fee is zero because USD 98.98 million is below the USD 105 million high-water mark.
The fund recovered during the year, but it did not recover enough to justify a new performance fee.
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