The Performance Fee represents a percentage that investors pay to funds Managers for profitable investments after each billing period. Here's a detailed explanation of how this calculation works.
Performance Fee Formula
The Performance Fee is calculated as:
Fee = (Profit since inception - High Water Mark) × Fee rate
Where:
Profit since inception: Total results from all closed and open positions from the investment's start until the current billing period ends or the investment closes
High Water Mark: The highest profit level reached at the end of any previous billing period
Fee rate: The percentage of investment profit payable to the funds Manager
At each billing period's end, we compare current profit to the previous High Water Mark. If profit exceeds this mark, the new higher value becomes the High Water Mark for future periods.
Note: If profit since inception is lower than the High Water Mark, no Performance Fee is charged for that period.
Calculation Example
Let's see how this works in practice:
A funds Manager sets a 10% Performance Fee rate
An investor places $5,000 in the fund
First billing period results:
Profit: $600
Performance Fee: $600 × 10% = $60
Investment equity after fee: $5,540
High Water Mark set at $600
Second billing period results:
Loss of $100 occurs
Current profit: $500
High Water Mark: $600 (from previous period)
Since profit ($500) is below the High Water Mark ($600), no fee is charged
The funds Manager only earns a Performance Fee when creating new profit highs, ensuring alignment with investor interests.