Pay at multi manager when fund down

Hi,
Multi manager hedge funds typically offer their teams a contractually agreed percentage of the PnL for compensation. But how does this work if the fund as a whole is down or just flat? Say your team made 100 mio usd but all the other teams together lost 200 mio. In this case the fund would not earn any performance fee, at least if they have the typical 2 and 20 fee structure or something similar. Do they pay from the management fee then? In theory the bonuses for the successful teams could even exceed the management fees earned.
What happens then?
Also how does this work if the MM fund as a whole is below high watermark after a pretty bad year? In this case the fund might not earn performance fee anytime soon, but the individual teams which are above high watermark would expect to be compensated.
Or do MMs have a different fee structure?

 
Most Helpful

Depends on whether there is "netting risk" or not. In some of the larger, better known MMs, PMs bear no netting risk, which means the get paid even if the overall fund is down. This is possible as bonuses are passed through as an expense to LPs.

It obviously doesnt look great for some teams to get paid by investors who have lost money, which is why these platforms keep such a short leash to try and minimize the number of teams losing $ in any given year.

 

Thanks for the answer. So, are bonuses always paid for via the pass through fee? Or only if there is no or no sufficient performance fee to cover bonuses? If there is both a pass through fee to pay for bonuses and a 20 percent performance fee, that would mean that the "effective" fee the investors have to pay for performance could be 40 percent or even more, right?

 

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