Align interest of fund manager and investors

Some fund managers claim that they align their interest with the investors by taking a share of the performance of the fund. This gives them the incentive to work hard and make the fund perform well.

This observation applies mainly to funds that have high performance fees, such as REITs, business trusts, hedge funds, quant funds and private equity funds. It also applies to companies that grant stock options with striking prices that are equal or just slightly above the current market price.

Do not be "taken in" by this statement.

For a fund manager to make this claim, they should be prepared to take a basic fee that is much lower than the market.

For example, the manager of a private equity fund usually charge an annual fee of 2% to 3% of the assets under management.

If the fund manager is "aligned", the manager should be prepared to charge a lower basic fee (e.g. 1%) and take a share of the gain in excess a hurdle rate.

For example, the performance fee can be 20% of the earnings of the fund, in excess of the hurdle rate of 6%. In this case, if the fund earns 10%, the fund manager will get 20% of 4%, ie an additonal 0.8%, as performance fee. This is additional to the basic fee of 1%.

If the fund earns less than the hurdle rate, the fund manager takes only the basic fee, which is lower than the market. In this way, the fund manager is "aligned".

If the fund manager wants to earn the usual fee and a large perfomance fee, the fund manager is "greedy" and not "aligned".