Crystallization - The Hidden Dimension of Hedge Funds’ Fee Structure

Abstract

We investigate the implications of variations in the frequency with which hedge funds update their high-water mark on incentive fees paid by hedge fund investors. Using data on Commodity Trading Advisors (CTAs), we perform simulations and a bootstrap approach to analyse the effect. We find a statistically and economically significant effect of the crystallization frequency on the total fee load. Funds’ total fee load increases significantly as the crystallization frequency increases. Our findings indicate that the total fee load depends not only on the management fee and incentive fee, but also on the crystallization frequency set by the manager.

Keywords: Hedge fund, CTA, Incentive fee, Fee structure, Gross returns, Crystallization

JEL Classification: G11, G23