How do funds actually collect fees?

I hope this doesn't sound like a dumb question but it's something I've never known.

How do funds actually collect fees? Lets say a fund charges 2/20 for the sake of simplicity.

Does that mean a fund sells off 2% of AUM at the start of the reporting period, and then sells 20% of the returns at the end of the reporting period?

Or are LP's expected to provide additional cash to cover the fees?

If you're selling off a percentage of AUM how do you account for market movements when you sell?

So I think the question is how is the fee structure that we're all familiar with actually turn into cash collected to pay running costs and comp/bonuses?



Thank you. That makes a lot of sense. I was thinking that some sort of lending/margin/prime brokerage may play a role.

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At my fund fees are collected daily, I guess it is pretty similar everywhere.

Each day the fund pays 2%/365 for the management fees
Regarding performance fées similar: if the fund made 1% today, 20bps are taken as perf fees and the fund will print 80bps.

Btw this creates a weird scénarios where the fund can get back the perf fees. For example if you do +5% gross on the first semester you will take 1% of perf fees. If you do -5% gross the second semester, you will give back the perf fees to finish the year flat and have 0 perf fees.

Regarding cash as was said earlier the fund always have cash on hand to pay fees and manage client redemption


Just adding to this, to avoid the scenario mentioned on performance/incentive fee, I have only encountered it where management fees are taken monthly (to fund running costs) and performance fee is taken at the end of the performance cycle I.e year end so that money is not paid out based on being up earlier in the year if flat at YE


So in a multi-manager fund is this done at the pod level? Is each PM paying the management fee on a daily basis or is there someone doing it all at the total fund level?

I had no idea this was the approach taken.


So basically investors are paying for unrealized gains annually?


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