It's easy for a hedge customer to miss the importance of the one-way incentive fee.
Prominent global macro hedge fund manager Caxton Associates LP recently reduced its management fee by 0.40% and its incentive fee level by 2.5%.
Most MLPs pay a general partner for administrative services, plus an incentive fee that escalates as a percentage of earnings as the dividend rises.
It ended last year down 6%, meaning Goldman was unable to capture the 20% incentive fee it would get on capital gains in the fund.
Liquid Markets layers another 1% fee atop all these and also gets its own incentive fee: 5% of the pool's profits, if they top 8%.
The "high-water mark" provision works this way: If the manager gets an incentive fee for taking the fund up X%, he doesn't get additional incentive fees until the fund tops a cumulative X% return.
Carried interest is different from an incentive fee.
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The 3.8% tax is prompting some managers to consider taking their own incentive pay as a fee rather than as "carried interest" subject to the 3.8% tax.
Before incentive fees (and not counting the annual fee), you are breaking even.
In my opinion, the commission model is the most conflicted because advisers have an incentive to push the products with the best commissions, but fee-only models have pitfalls, too.
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Posner chucked out the suit in a 2008 decision that should be required reading for all law students, explaining how attorneys in such cases and their targets have an incentive to settle for peanuts since the lawyers will get a fee and the defendant will avoid millions of dollars in discovery costs.
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The lawyers themselves, of course, have a financial incentive to settle on terms that reward them with the most profitable fee in comparison to the time invested in the case.
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Taylor of Texas and Robert A. Pritchard of Mississippi, meanwhile had an incentive to maximize settlements for their Southern clients, who came unencumbered with any fee-splitting deal at all, the court said.
Of course, since these managers are paid a fee based upon the value of the assets they manage, they have every incentive to inflate valuations.
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The adviser would have an incentive to dissuade the investor from any investment strategy that might decrease the total assets under management and the fee base.
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Dornan's class action alleges that at least since 1990 variable annuity underwriters and Morgan Stanley maintained "secret contingent fee sharing arrangements" in which a portion of commission revenue was paid to the brokerage as an incentive to sell the product.
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