Potential Implications of Rapuano’s Break with the Pack
Nov 20th, 2006 | Filed under: Investment Management FeesThe hedge fund community is in a tizzy about value investor Lisa Rapuano’s break from the pack regarding hedge fund fee structures. As the New York Times details, she is launching a new fund with a 40% performance fee that is calculated triennially instead of once a year.
While “40%” and “triennial” make great headlines, it’s important to peel back the layers of the onion to understand what this may portend for the industry. Succinctly stated, we believe that Lisa Rapuano has opened a Pandora’s Box of issues for the hedge fund industry.
A Return to Symmetrical Compensation
First of all, Rapuano is essentially tackling a common criticism of the hedge fund industry: that manager compensation is asymmetrical. There are no “negative performance fees”. That is, managers never “give-back” performance fees when a fund is down in subsequent years.
However, it’s worth noting that hedge funds already have de facto “intra-year” negative performance fees. In other words, performance fees are accrued and “un-accrued” monthly until they are paid out at year end. So extending the finish line to 3 years from one year, means more of these “negative performance fees” can be charged back to the manager. This makes manager compensation more normally distributed and less option-like in the short run.
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[…] More (asymmetrical) performance fees?  Where is Lisa Rapuano when you need her?   […]
[…] At the end of the day long-only performance fees face some of the same accounting challenges that hedge fund performance fees have always faced (e.g. the dreaded “equalization accounting” and other issues contained in this posting). But they go some way toward solving the asymetry issue. And at least picking the “specified securities index” (a.k.a. beta hurdle, see related posting) is a lot easier with long-only funds than with hedge funds (where the industry is currently groping the dark for indices containing the appropriate blends of various alternative betas). […]