This document compares three methods for calculating performance fees for investment managers: the whole of fund method, series of shares method, and equalization share adjustment method. The whole of fund method calculates fees at the fund level, which can generate biased results for new investors. The series of shares method issues a new series of shares for each subscription, addressing free riding but resulting in multiple share classes. The equalization share adjustment method ensures all investors are treated fairly by providing credits or debits to reduce fees paid based on subscription prices, allowing a single net asset value to be reported. It is the most complex to implement but provides the fairest treatment of investors.

1. Performance Fees for
Investment Managers:
A comparison of widely
used models
Grigoris Anagnostopoulos
Consultant

2. Investment Manager Performance
The aggregate performance achieved by a
fund’s investment manager is typically
assessed by its current NAV taking under
account:
 High Water Mark (HWM), i.e. the previously
achieved highest NAV level (end of period)
 Hurdle Rate, i.e. the return achieved by a
comparable benchmark index, floating, or
absolute rate of return

3. Performance Fee Pitfall #1

4. Performance Fee Pitfall #2

5. Example: Evolution of Share Price, High Water Mark, and Hurdle Rates

6. Calculation methods

7. 1. Whole of Fund Method
With this method, performance
fees are calculated at the fund’s
level without considering
investors individual returns. The
calculation provides asymmetric
results since it attributes the
performance fees among
investors on the pro-rate basis
of their investment.

8. Whole of Fund Method
Pros/Cons
CONSPROS
Easy to implement Generates biased results to new investors
in both case where NAV is above or under
HWM
Easy for investor to understand It is not representative of individual losses or
gains.
A single NAV per share can be
reported to all shareholders
It does not resolve neither the free ride
nor the claw back issues

9. Example: Whole of Fund Method
 NAV Frequency: Monthly
 Measurement Period: Quarterly
 HWM: 1000 & no Hurdle rate
 Monthly Subscriptions: Equal amount of shares for each investor
7,73% Total Return
20% of 77,3 excess
return above HWM
Total Fees = fee per
share * Holdings
Launch Date Month 1 Month 2 Month 3
Monthly Change % 0% 5% 8% -5%
Value 1000 1050 1134 1077,3
Fee Rate 20% HWM 1000
FeesPer Share 10 26,8 15,46
NAV Per Share 1000 1040 1107,2 1061,84
Investor Holdings GrossNAV Total Fees NAV NAV / Share
A 1000 1.077.300,00 € 15460 1.061.840,00 € 1.061,84 €
B 1000 1.077.300,00 € 15460 1.061.840,00 € 1.061,84 €
C 1000 1.077.300,00 € 15460 1.061.840,00 € 1.061,84 €
Perfromance Fees
GrossAsset Value
End ofQuarter
Net Asset Value

10. 2. Series of Shares Method
Therefore, on launch date the fund
starts by issuing the “Lead series” of
shares and at any subsequent point, a
new series will be issued at the same
price as the Lead series.

11. 2. Series of Shares Method
At the end of the measurement
period, each series that has
increased in value above the HWM
will be consolidated with the lead
series whereas the series that
remained below HWM will continue
into the next measurement period.

12. Series of Shares Method
Pros/Cons
CONSPROS
Depending on the measurement interval, the
number of issues can be quite large i.e for
Yearly measurement period, a monthly fund
can have 12 Series while a daily fund 252
series for each trading day
Accurate and relatively simple to
implement
If fund performance is not adequate to
overcome the HWM there are many opened
series.
Easy for investor to understand It is not possible to report a single NAV per
share since each series has its own NAV.
There is no free ride for new investor
and it resolves any claw back
syndromes
Time consuming and administratively intense.

13. Example: Series of Shares Method
 NAV Frequency: Monthly
 Measurement Period: Quarterly
 HWM: 1000 & no Hurdle rate
 Monthly Subscriptions: Investor A entered at Launch Date, Investor B at the end of
Month 1 and investor C at the end of Month 2
Each series of shares realizes different
returns within the quarter
Launch Date Month 1 Month 2 Month 3
Monthly Change % 0% 5% 8% -5%
Leading Series 1000 1050 1134 1077,3
SeriesII 1000 1080 1026
SeriesIII 1000 950
Fee Rate 20% HWM 1000
Leading Series 10 26,8 15,46
SeriesII 0 16 5,2
SeriesIII 0 0 0
Leading Series 1000 1040 1107,2 1061,84
SeriesII 1000 1064 1020,8
SeriesIII 0 1000 950
Investor Holdings Series GrossNAV per Share Total Fees NAV NAV / Share
A 1000 Leading Series 1.077.300,00 € 15460 1.061.840,00 € 1.061,84 €
B 1000 SeriesII 1.026.000,00 € 5200 1.020.800,00 € 1.020,80 €
C 1000 SeriesIII 950.000,00 € 0 950.000,00 € 950,00 €
15,46 per Lead share
5,2 per SeriesII share
0 per SeriesIII share
FeesPer Share
GrossAsset Value
Perfromance Fees
7,73 % Total Return
2,60 % Total Return
-5 % Total Return
End ofQurter
Net Asset Value
End ofQuarter
Each series of shares realizes different
returns within the quarter
Different NAV per share for each series
Investors pat a fair fee base on the
purchase price

14. 3. Equalization Share Adjustment
Method

15. Equalization Share Adjustment…

16. Equalization Share Adjustment Method
Pros/Cons
CONSPROS
Ensures that all investors are
treated fairly
Computationally complex methodology
difficult to be digested by investors
Generates a single NAV for the
fund
Time consuming and administratively intense
without the use of specialized software
There is no free ride for new investor
and it resolves any claw back
syndromes

17. Example: Equalization Share Adjustment
 NAV Frequency: Monthly, Measurement Period: Quarterly
 HWM: 1000 & no Hurdle rate
 Monthly Subscriptions: Each investor gets an equal amount of shares but also gets a credit/debit
depending on subscription price
Credit is used to reduce the fee charge on
a pro rata basis to each investor
Credit/Debit =
(Subscription Price - HWM)*Fee* Holdings
Single NAV per share for all investors
Launch Date Month 1 Month 2 Month 3
Monthly Change % 0% 5% 8% -5%
Value 1000 1050 1134 1077,3
Fee Rate 20% HWM 1000
FeesPer Share 10 26,8 15,46
Nav Per Share 1000 1040 1107,2 1061,84
A B C
Purchased Shares 1000 1000 1000
Credit/Debit - € 8.000,00 € 21.440,00 €
Investor Initial Holdings GrossNAV per Share Total Fees NAV NAV / Share
A 1000 1.077.300,00 € 15.460,00 € 1.061.840,00 € 1.061,84 €
B 1000 1.077.300,00 € 15.460,00 € 1.061.840,00 € 1.061,84 €
C 1000 1.077.300,00 € 15.460,00 € 1.061.840,00 € 1.061,84 €
Investor Credit/Debit in Use SharesAdjustment Total Holdings Equalized NAV Equalized FeesPaid NAV / Share
A 0 0 1000 1.061.840,00 € 15.460,00 € 1.061,84 €
B 8.000,00 € 7,53 1007,53 1.069.840,00 € 7.460,00 € 1.061,84 €
C 15.460,00 € 14,56 1014,56 1.077.300,00 € - € 1.061,84 €
End ofQurter
7,73 % Total Return
After Equalization
Perfromance Fees
GrossAsset Value
Subscription & Equalization Credit/Debit
Net Asset Value
End ofQuarter
15,46 per share
Investor A: Credit =(1000-1000)*20%*1000
Investor B: Credit =(1040-1000)*20%*1000
Investor C: Credit =(1107,2-1000)*20%*1000

18. Whole of Fund Series of Shares Equalization Shares Adjustment
Single NAV
&
Single Series
Yes No Yes
Communication Straightforward Moderate Complex
Calculation Simple For Each series For each shareholder
End of Period
Adjustments
Crystalize fees,
Reset HWM &
Hurdle Rate
Crystalize fees,
Reset HWM & Hurdle
Rate
Consolidate Series
Crystalize fees,
Reset HWM,
Adjust shares for each shareholder,
Determine unused Credit & Debit
Recommended No Yes Yes with software
Comparison of Performance Fee calculation methods