Treatment of Fees and Expenses

Timothy Peterson

One of the most common questions asked when it comes to performance reporting for alternative strategies is, “How should I report net performance?” The question is simple enough on its face. However, unlike traditional assets, alternative investment vehicles tend to be highly customised. The assessment of a fee could be subject to several conditions. Some vehicles may have a different set of conditions from another, even though the embedded investment strategy is the same.

This chapter covers an overview of the types of fees and expenses; reporting net-of-fee performance; and a discussion of performance incentive fees. Also, we will try to emphasise the practical: what a firm must do, what a firm may do and what a firm should do with respect to reporting net-of-fee investment performance.

FEE TREATMENTS AND STRUCTURES IN ALTERNATIVE INVESTMENT VEHICLES

Since the mid-2000s the investment management industry has seen an increase in investment in alternative investment vehicles – namely hedge funds and private equity funds. These funds have been creative in their implementation of fee structures used to compensate managers for investing client assets in equally creative ways