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Equalization accounting

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Equalization accounting Historically, hedge funds typically provide for some form of performance-based compensation to the investment manager of the hedge fund (as set out above under section 3).   This has generally been a percentage of the increase in the gross assets over the prior high water mark.  For example, if the prior performance fee period had a net asset value of 100 and the following period's net asset value was 120 then the further performance fee for the period will be paid on the amount of that increase which is 20 and the high water mark for this following period would be set at 120. Thereafter if the net asset value fell below 120, no performance fee would be payable.  Although relatively simple to understand, there were certain situations where individual shareholders would suffer a fee not in line with performance and, consequently, the investment manager would receive either too large or  too small a fee relative to the individual shar...
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PERFORMANCE FEE EQUALISATION

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When setting up a fund, one of the first decisions a manager has to make is the choice of fund structure. Partnership structures are very common in US domestic funds because they offer tax transparency to investors. Accounting calculations for partnership structures are relatively straightforward. Individual capital accounts are maintained for each partner and performance fees are calculated at the capital account level per partner. Therefore, there are no equalization issues for managers to contend with.   In Europe, a combination of other fund structures is frequently used which requires calculations of per share/unit price.   In calculating performance fees in these structures, the overriding concern among managers has been in determining how to fairly reward the manager for positive performance while at the same time ensuring investors are treated equitably. Essentially, this is where the various forms of performance fee Equalisation come in.   One of t...
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Understanding Master-Feeder Accounting

It appears that you've provided a detailed article about master-feeder funds and related topics. This article covers various aspects of master-feeder funds, including their structure, advantages, disadvantages, operational considerations, and advanced topics. Here's a summary of the key points in the article: 1. Master-Feeder Fund Structure: A master-feeder fund is a two-tiered investment structure. Investors deposit capital into a feeder fund, which then invests in a master fund managed by the same advisor. The master fund invests in the market according to the partnership agreement. 2. Master-Feeder Fund Characteristics: Feeder funds receive capital from investors and invest it in the master fund. All income attributes generated by the master fund, such as dividends, interest, gains, and tax adjustments, pass through to the feeder funds. 3. Master-Feeder Fund Types: A typical master-feeder structure includes one U.S. ("onshore") feeder and one non-U.S. ("offsho...
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