How Fund Management Allocates Profits
In fund management, investors' capital is combined into a single fund account managed by the Fund Manager (FM). The FM trades with this pooled capital, and profits are distributed to each investor based on their equity share in the fund.
Equity Share Calculation
The equity share determines how trading results are allocated to each investment in the fund and is calculated using this formula:
Equity Share = Individual Investment Equity ÷ Total Fund Equity
Investment equity represents the amount an investor has in their account, including any unrealized profits or losses from open positions.
Profit Distribution Example
Let's examine how profit distribution works with three investors:
Investor A invests $60,000 Investor B invests $30,000 Investor C invests $10,000
The total fund size is $100,000, and the Fund Manager charges a 25% performance fee on profits.
During the investment period, the fund achieves a 15% gain, generating $15,000 in profits. After deducting the performance fee of $3,750 (25% of $15,000), the remaining $11,250 is distributed among investors based on their equity share:
Investor A (60% of fund): Receives $6,750 (60% of $11,250)
Investor B (30% of fund): Receives $3,375 (30% of $11,250)
Investor C (10% of fund): Receives $1,125 (10% of $11,250)
This allocation system ensures that profits are distributed proportionally to each investor's contribution to the fund.