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Imagine, fund A has 1 founder and 3 PM, the fund gets a performance fee of 20%. The founder takes 10% and the PMs get 10% of PnL on their positions.
the fund has $300m AUM and each PM manages $100 of that.
PM A makes a 20% return ($20) and should get paid 10% of that ($2m)
PM B and PM C each lose 10% (-$10m each)
The fund made $0 pnl and despite PM A having a great year there is no performance fee to pay him.
this is handled many different ways, commonly PM B and PM C have to get back to $0 PnL before they start earning their 10% again - the first $20 PM B and PM C earn will be used to pay PM A for he $2m he was supposed to get. the issue is, PM B and PM C often just quit or get fires in this situation or otherwise resent working for ‘free’ until they make 20% returns before getting paid again
Great answer, it clarifies it very nicely. Thanks for that. One question though. Is it really a problem for the big funds since they are expected to be up on aggregate anyway? I.e. is it even a top 5 priority for a pm to worry about?
At large multimanagers, the concern of netting is at the team level, there may be multiple Junior PMs/Senior Analysts that each get a percentage of their PnL and thus the concept is the same. If the pod makes no money, no one gets paid. Also it is an issue for the PM trying to retain his team if a rockstar Senior Analyst is carrying the team and not getting paid he’s likely to leave. Alternatively if a Senior Analyst is in a hole and needs to ‘pay back’ his teammates before making money again, they’re likely to leave
Ah I see how this will be a big problem within the pod. Is it typical for analysts to have separate portfolios within the pod? As opposed to having one account and somehow attributing p&l to analysts? I understand that the concept would be the same for either case but there would be more "gray area" for the latter case.
There are a wide range of approaches, but at MMs given most analysts will have a sector coverage its somewhat clear regardless who generated PnL and who didn’t. Now the extent to which the PM vs senior analyst ‘generated’ the PnL or sometimes favorable/unfavorable sector tilts mandated by PM contributed to the PnL number can be a point of contention. Mostly people are paid what’s required for them to not quit
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