How this number is made
This is one investor, one year, and no high-water mark carried in from last year. The management fee is a percent of starting capital. The performance fee is a percent of the gain above the hurdle, and it is not reduced by the management fee. If the gain does not clear the hurdle, the performance fee is zero and the management fee is still charged. Funds disagree on this order. Read the note before you treat it as your partnership agreement.
- A “2 and 20” fund is a 2% management fee and a 20% performance fee.
- Set the hurdle to the preferred return. Zero means the performance fee starts on the first dollar of gain.
Formula
Management fee = capital × management rate. Performance fee = performance rate × the gain above capital × hurdle. Net = gross gain − both fees.
Worked example
With the figures already in the form, net profit after fees is $140,000.
Questions
Where is the high-water mark?
Not here. If last year is still underwater, a real fund may charge no performance fee. This page only sees the year you typed.
Is the fee taken before or after the hurdle?
The performance fee ignores the management fee. Some agreements deduct the management fee first. If yours does, lower the gross return by that fee before you type it, and set the management fee to zero so it is not counted twice.