This is a minor (yet at the same time really important) question. This is for you guys that work for hedge funds or HF FoF and have experience with reporting practices.
My fund pays its performance fees on a quarterly basis but the 1 pager shows monthly returns. Now, because the performance fee is earned over the quarter I've realized that I have some options as far as how to report and I was wondering if there was a standard way of reporting this. For example (net of all fees except the perf. fee), my fund was up 12% in January and 25% in February, and for simplicity of illustration purposes, let's assume the fund loses 1% in March (before the performance fee).
If the performance fee shows up only in month it becomes payable, then the last month shows a larger drawdown than really occurred:
Jan 12%, Feb 25%, Mar neg. 8.7%
I think this is a bit weird, because it doesn't accurately reflect returns. I guess I could make the performance fee as something that gets earned/deducted from as the fund goes up/down through the quarter, but this would have the effect of reducing volatility, and I don't want to necessarily understate the fund's volatility either (well, I guess I do, but only if that's standard practice). I guess my justification could be that many fund's pay performance fees on a monthly basis, and as such they would not have this issue, but if they report a daily std. dev. then they do face the issue of how the treat perf. fee accruals on a daily basis...
My guess is that perf. fees are shown when they become payable and there is no amortization (just because that's the easiest thing to do), but just wanted to see if anyone knew of anyone doing it otherwise. I guess the same thing goes for management fees since I incur those for the quarter, but they are payable on one month. I don't know if I want to go all accruals crazy...
I know this is a rather nitpicky question but I'm nitpicky when it comes to my fund haha. All comments from individuals with experience with this are greatly appreciated. Thanks.
Equalisation across the three months I would have thought...not that usual to have a monthly performance fees....Is there a quarterly crystallising HWM as well? if so that would make a little more sense.
There is a HWM every quarter, yes. I think funds that do redemptions/subscriptions on a monthly basis have monthly performance fees. It's usually easiest to have performance fees and management fees match the time periods for redemption/subscription.
I was going to say that they should obviously be accrued in the month they were earned, but I guess that would leave you with the problem of having to "restate" performance for past months if you end the fee calculation period with a down month, or show a negative gross performance and a less negative or positive net performance for the 3rd month. More complicated than you'd think I guess.
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