Set up a performance fee
A performance fee is calculated based on the fund return. For each day in the calculation period, the NAV increase is compared to a threshold (benchmark, hurdle rate, or index), and the difference is multiplied by the fee percentage. The daily fees are summed to get the total amount.
Example for a fund that uses a yearly hurdle rate of 5%, with a 1% performance fee. Assuming 365 days in a year, the daily hurdle rate is calculated with the formula:
Fund return over the hurdle rate would be:
Day 0 | Day 1 | Day2 | Day 3 | |
|---|---|---|---|---|
NAV in EUR | 100 000 | 101 000 | 100 500 | 101 200 |
Daily hurdle amount (Previous NAV*Daily hurdle rate) | - | 13,368 | 13,502 | 13,435 |
Daily return in EUR (Current NAV - Previous NAV) | - | 1 000 | -500 | 700 |
Excess return in EUR (Daily return - Daily hurdle amount) | - | 986,632 | -513,502 | 686,565 |
Daily performance fee in EUR (Excess return * Fee %) | - | 9,86632 | -5,13502 | 6,86565 |
The total performance fee for three days is 11,60 EUR.
Example for a fund that uses a benchmark as a threshold, with a 1% performance fee:
Day 0 | Day 1 | Day2 | Day 3 | |
|---|---|---|---|---|
NAV in EUR | 100 000 | 101 000 | 100 500 | 101 200 |
Daily return in EUR (Current NAV - Previous NAV) | - | 1000 | -500 | 700 |
Benchmark change in % | - | 0,9% | -0,3% | 0,5% |
Benchmark change in EUR (DailyReturn * Benchmark change %) | - | 900 | -303 | 502,5 |
Excess return in EUR (Daily return - Benchmark change) | - | 100 | -197 | 197,5 |
Daily performance fee in EUR (Excess return * Fee %) | - | 1 | -1,97 | 1,98 |
The total performance fee for three days is 1,01 EUR,
Choose or create a fee formula
Fee formulas in FA Fund Management determine the calculation method, including the fee parameters and the day count convention used. You can choose one of the pre-made configurations or create your own formula if the existing ones don't suit you.
Available performance fee formulas are:
Formula | Description | Transaction type |
|---|---|---|
Accrued performance fee based on NAV and hurdle rate (ACT/365) | Performance fee with benchmark/hurdle rate and high-water mark using ACT/365 day count convention. | Performance fee,PFEE |
Accrued performance fee based on NAV and hurdle rate (ACT/ACT) | Performance fee with benchmark/hurdle rate and high-water mark using ACT/ACT day count convention. | Performance fee,PFEE |
Performance fee with crystallization (FUND-PFEE-CR) | Performance fee with hurdle rate and high-water mark since the previous crystallization. | Performance fee,PFEE |
To create your own fee formula:
Open the NAV status view, click the gear icon in the top-right and choose Fee formulas.
Click Add formula and fill in the fields:
- Formula name
The name of the formula. You will see it when you choose the fee formula in the fund or share class settings.
- Code
The formula code used to identify the fee formula in the system.
- Fee type
Fee type. Select "Performance fee".
- Transaction type
Transaction type to use for the fee accrual: choose "Performance fee (PFEE)".
- Use high-water mark
Calculate performance fee using high-water mark: the performance fee will be charged only if the NAV exceeds the high-water mark. The high-water mark is specified in the share class settings, Fee structure tab, when you choose the fee formula you created and link it to the share class.
- Threshold return
The basis for calculating threshold return. Choose an option:
Benchmark. Use the benchmark set for the fund portfolio in FA Back (Portfolio window, Benchmark tab)
Hurdle rate. The hurdle rate for the performance fee is specified in the share class settings, Fee structure tab, when you choose the fee formula you created and link it to the share class.
Variable return rate โ index. Index should be created as a security in FA Back.
- Day count
(For fixed and variable return rate-based fee formulas) The day count convention to define the number of days in the accrual period.
- Offset days
(For variable return rate-based fee formulas) Offset from the calculation date. For example, choose "1" to use the index value of the previous day (if it's not available โ the latest available index value is used).
- Spread
(For variable return rate-based fee formulas) Spread to add to the index value when calculating the threshold.
- Security
(For variable return rate-based fee formulas) Index security.
- Description
Fee formula description.
Save the changes.
Define the fee parameters
The next step is to include the fee in the share class fee structure:
If the fee is based on the benchmark, define it for the fund portfolio the Portfolio window, Benchmark tab (see Portfolio window in FA Back reference).
In the fund settings:
Set the fee capitalization account for the fund in the Basic info tab. Enable Set as fee capitalization account for the cash account you want to use for fee capitalization. You can only set one account for fee capitalization per fund. If you do not set a fee capitalization account, the system uses the account you marked as the default account in the Basic info tab.
(Optional) If you want to use a separate schedule for calculating fees ( see Separate schedule for ongoing fees for details), set it up in the Schedules tab.
Define the fee capitalization schedule in the Schedules tab. For details about schedule settings, see Create a fund.
Add the performance fee in the share class settings. Open the Fee structure tab, add the fee formula, percentage and other parameters (for details about fee parameters, see Add share classes). Select Use crystallization schedule for capitalization in Additional options.
You can track the accrued fee in the NAV overview. On the crystallization date, FA Fund Management creates transactions to capitalize the accrual: a withdrawal transaction from the fund's cash account and a deposit transaction to the fund's fee account.
Set up performance fee equalization
Performance fee with equalization ensures that every shareholder pays the same percentage of performance fee no matter when they subscribed to the fund.
For the fee equalization, the fund subscriptions are executed with NAV excluding the performance fee. To equalize the performance fee in the future, FA Fund Management creates compensation trade orders for buying or selling fund units. The trade order type depends on the current share class NAV (without performance fee) compared to the high-water mark (HWM) - the highest NAV value in the share class:
If NAV (without performance fee) is smaller than HWM, a trade order with Equalization debit (EQDE) transaction type is created.
If NAV (without performance fee) is greater than HWM, a trade order with Equalization credit (EQCR) transaction type is created.
The trade amount is calculated as subscription amount * performance fee per unit.
On the crystallization date, when you accept NAV:
HWM is updated to the NAV value if the current NAV is higher than HWM.
The compensation trade orders are executed.
To set up the performance fee with equalization, you need to specify the schedule for the fund and enter the fee details on the share class level:
In the fund settings:
In the fund settings, Schedules tab, set the fee crystallization schedule. For a newly created fund, the first fee date in the schedule must be the same as the fund inception date you entered in the Basic info tab. If you transfer an existing fund into FA Fund management app, make sure that the first fee date is the crystallization date.
In the Fee structure tab, select Calculate performance equalization fee with contingent redemption method. The "Performance fee with crystallization" formula is used to equalize the performance fee on the crystallization date.
For details and field descriptions, see Create a fund.
In the share class settings, specify the fee properties in the Fee structure tab, Performance fee equalization section.
For details and field descriptions, see Performance fee equalization).
FA Fund management app accrues the performance fee every time you calculate and accept NAV. On the crystallization date, when you calculate and accept NAV, FA Fund management calculates performance fee and creates compensation trade orders. You can view the fee amount in the NAV window.