Question regarding MM passthrough: do LPs pay for the passthrough out of their own pockets in addition to their capital commitment (the amount given to MM for investment) or the passthrough is generally deducted from the investment return of the fund?For example, let's say the total commitment given by LPs is 1 billion, the fund levered it 5x to 5 billion. The overall return on 5 billion is 3% which amounts to 150mm. To simplify the calculation assume all pods have same performance and each team has a P&L split of 15%, the total expense on PM compensation(including analysts and subPM) is therefore 22.5mm. Adding another 20mm for other expenses such as IT, terminals, trading, admin, accounting, salary etc, gives a total expense of 42.5mm for the year. Here comes the question: do LPs need to pay additional 42.5mm to cover these expenses or the 42.5mm come from the 150mm return generated by the fund? If the latter is the standard practice, would it be correct to assume that the 42.5mm will be deducted first to cover PM compensation and other expenses, then the remaining profit would be split 20/80 between GP and LP as carry ?

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Question regarding MM passthrough: do LPs pay for the passthrough out of their own pockets in addition to their capital commitment (the amount given to MM for investment) or the passthrough is generally deducted from the investment return of the fund?For example, let's say the total commitment given by LPs is 1 billion, the fund levered it 5x to 5 billion. The overall return on 5 billion is 3% which amounts to 150mm. To simplify the calculation assume all pods have same performance and each team has a P&L split of 15%, the total expense on PM compensation(including analysts and subPM) is therefore 22.5mm. Adding another 20mm for other expenses such as IT, terminals, trading, admin, accounting, salary etc, gives a total expense of 42.5mm for the year. Here comes the question: do LPs need to pay additional 42.5mm to cover these expenses or the 42.5mm come from the 150mm return generated by the fund? If the latter is the standard practice, would it be correct to assume that the 42.5mm will be deducted first to cover PM compensation and other expenses, then the remaining profit would be split 20/80 between GP and LP as carry ?

Carry is after asset management fee / pass through.

so the net return to the investor Would be 80% * (150-42.5) = \$86mm which would be 8.6% fund net return.

Thanks for the answer. It makes perfect sense that the management fee and pass through come from the return of the fund as long as the return is enough to cover the expenses. What if the fund has a down year ? In that case would LPs be required to pay additional \$ to cover both management fee and other expenses, or the fund would simply put aside the management fee and other expenses such as admin and salary from the initial LP commitment ? In other words the actual amount deployed for investment is less than the actual fund commitment ?

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