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Not exactly sure what you're asking but happy to try answer any q's. Couple points: I realize your example scenario is very hypothetical and just rough math, b
by qwrusz 10y ago
Not exactly sure what you're asking but happy to try answer any q's.
Couple points: I realize your example scenario is very hypothetical and just rough math, but a heads up about understating fees as these add up fast: For the hedge fund in year 2 when the value of the fund doubles to $20M or whatever it gets to, the 2% management fees are charged on those higher amounts. So after year 1 fees are ~$400k, ~380K, $360K etc...
With that said, a hedge fund is going to have much higher operating costs than a VC firm. The trading systems and technology costs at hedge funds can get very expensive and it comes out of the 2%. What does a VC firm need 2% every year for? Many of them seem to do their job using only a blue bottle coffee gift card and an iPad to check their schedules and answer emails, what are those management fees spent on?
Also despite having 2 and 20 in common, hedge funds and VC funds are completely different animals, comparing them is really apples to oranges. But yes in your example HF managers can earn more, one could just as easily come up with a scenario where the VC guys earn more.
Lastly, in some cases there is "clawback" on hedge fund fees. The hedge fund would give back some of the previously earned performance fees if say there's consecutive down years. It depends on the terms of fund, every fund is different and the documents of a fund's terms can be hundreds of pages long.
- JumpCrisscross 10y ago> Not exactly sure what you're asking Pardon me, that was "curious" as in "exciting attention as strange, novel, or unexpected" [1], not short for "I am curious". That said, thank you for your comment. > one could just as easily come up with a scenario where the VC guys earn more When comparing carry-on-distribution versus carry-on-mark, ceteris paribus, I don't think so. High-water marks and clawbacks help, but they're ultimately a patch for a time-horizon mismatch between the LP and the GP. Note that I wasn't comparing VC and hedge funds. I was comparing how they calculate carried interest. A hedge fund manager charging carry like a VC would assess on redemption, or at least only when a position is sold. The liquidity and transparency that benefit investors also give hedge fund managers another way to charge fees. [1] https://www.merriam-webster.com/dictionary/curious https://www.merriam-webster.com/dictionary/curious
- qwrusz 10y agoHaha, oh that definition of curious. My bad. (side note: I am curious why the M-W dictionary puts the archaic and obsolete definitions first) Gotcha on the carried interest. Ya we have come a long way from sailing molasses across the ocean to calculate a carry. While scenarios and clauses can change payment to managers, c.p. or not, if we cut to the chase I think it's safe to say yes the incentive carry structures in hedge funds generally favor HF managers getting paid much more compared to VCs. When the top HF managers annual pay news articles come out, these numbers can get crazy, top 10 HF managers can make more in one year than the entire net worth of a top venture capitalist with decades in the industry. But VC guys get to do way more interesting investing, meeting with new tech companies is much cooler than public equity research I think. Thanks for posting this article btw.
- JumpCrisscross 10y ago> sailing molasses across the ocean to calculate a carry Got a reference on this? Sounds fascinating.
- qwrusz 10y agohttps://en.wikipedia.org/wiki/Carried_interest#Definition_and_history https://en.wikipedia.org/wiki/Carried_interest#Definition_an... https://dash.harvard.edu/bitstream/handle/1/12274462/Legnani_gsas.harvard_0084L_11471.pdf https://dash.harvard.edu/bitstream/handle/1/12274462/Legnani...