March 24, 2003

Consultant Wonders if Performance Fees Are Fair

LONDON (HedgeWorld.com)--Fitzrovia International plc devised a performance fee checklist for determining the suitability of a given fund's performance fee as part of a recently published report.

The fund consultant also surveyed funds using performance fees about their use of hurdle rates, indexes, high-water marks, fee equalization, and fee caps.

Fitzrovia took on the research because of the growing interest in and use of performance fees. "It's sort of a hot topic," said Claire Appleton, a senior project manager who was in charge of the report. While there's no single right answer on how to structure a performance fee, asking the right questions can lead an investor or fund company into a good decision.

Some of the questions on the list are fairly obvious, such as "How is the performance fee calculated?" or "Is there a hurdle rate." Fitzrovia's survey found that 87% of alternative investment funds use a high-water mark, 4% use a benchmark performance index, and just 18% use a hurdle rate.

But Fitzrovia also dug a little deeper, suggesting that managers add features not commonly found among hedge funds. On the checklist are questions such as "Is there a fee cap?" and "Is there a penalty for underperformance." Those both lead into topics that most hedge fund managers aren't likely to be eager to talk about, particularly given the sizable losses some funds have taken in recent years. Not one fund in the survey used a fee cap, according to Fitzrovia.

Fitzrovia's executives believe that now, when fund managers are having a harder time earning performance fees, is the appropriate time to review performance fee structures.

PBarr@HedgeWorld.com

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