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Equitable Performance Fees for Hedge Funds

29 Pages Posted: 2 Dec 2003  

David Lee Kuo Chuen

Singapore University of Social Sciences (SUSS)

Steven Lwi

Ferrell Asset Management

Kok Fai Phoon

Ferrell Asset Management

Date Written: September 2002

Abstract

Hedge funds are collective investment vehicles fast becoming popular with high net worth individuals as well as institutional investors. Given an incentive structure that involves fees based on performance, this paper proposes a structure and "equalization" process that is both equitable and transparent to investors. The structure involves the use of multi-portfolios giving any fund a structure similar to that of a partnership organization. The "equalization" process is demonstrated using stylized examples that illustrate the equalization procedures and computations. We believe that the approach improves on current methods and meets the objectives of equity and transparency, thus improving the incentive compatibility between the fund manager and investors.

Keywords: hedge fund, performance fees, equalization process

JEL Classification: G2

Suggested Citation

Kuo Chuen, David Lee and Lwi, Steven and Phoon, Kok Fai, Equitable Performance Fees for Hedge Funds (September 2002). Available at SSRN: https://ssrn.com/abstract=340900 or http://dx.doi.org/10.2139/ssrn.340900

David Lee Kuo Chuen (Contact Author)

Singapore University of Social Sciences (SUSS) ( email )

461 Clementi Road
Singapore, 599491
Singapore

Steven Lwi

Ferrell Asset Management ( email )

80 Raffles Place #28-21
UOB Plaza 2
Singapore 048624
Singapore

Kok Fai Phoon

Ferrell Asset Management ( email )

80 Raffles Place #28-21
UOB Plaza 2
Singapore 048624
Singapore

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