One fee after the entire fund nets
Fund-level incentive fee—Investor ending wealth—
Part 01 · Multi-manager fees
Paying winners before losses net.
A 90-PM system can pay profitable books while losing books still reduce the fund’s return. Calculating payouts book by book produces more fees than calculating one fee after the fund nets.
$10m start90 PM books20% modeled payout
Hidden cost of netting risk—netting leakage— lost compounding— less investor wealth in total
PM payouts before full cross-netting
PM incentive payouts—Investor ending wealth—
Why the fee is larger
Select a year to see the gains, losses, and fees.
2018
Profitable PM books—Eligible for payout
Losing PM books—Still borne by the fund
Combined fund P&L—After all 90 books net
Full performance netting
All PM gains and losses combine before one fund-level fee.
—One fund-level high-water markNetting-risk payout
Profitable PM books trigger payouts; losses elsewhere do not cross-offset.
—Separate PM-book high-water marksFund-level fees to date
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PM payouts to date
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What netting risk costs the investor
Same gross PM-book returns; two compensation boundaries.
2018
Full performance nettingPM-level netting risk
Part 02 · SMA management fee
Paying a fee with no tax deduction.
A tax-aware strategy earns the same return in both paths. One path pays no fee. The other pays 1% of average AUM, receives no modeled deduction, and compounds from a smaller base.
$10m start1% average AUM$0 modeled deduction
All strategy return keeps compounding
Ending wealth—Annualized return—
Eight-year cost—less wealth— paid directly in fees
Cash leaves before it can compound
Ending wealth—Annualized return—
The annual cash drain
The fee is certain, even when the strategy return is not.
2018
Opening account—Starts the year invested
→
Strategy P&L—Before manager fee
→
1% AUM fee—Tax deduction: $0
→
Closing account—What compounds next
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Fees paid to date—Direct cash charges
Wealth gap to date—Fee plus lost compounding
Tax offset$0Scenario assumes no deduction
The wedge compounds
Only two paths: no fee versus 1% nondeductible.
2018
No manager fee1% nondeductible AUM fee