Written by: Patrick Lillie
With my previous blog briefly describing what hedge funds are, I can now describe how the company I’m interning with, Equinoxe, ties into hedge funds. Equinoxe, as I have said before, is a hedge fund administrator, and after working here for a few weeks, I finally know what that entails! Most people say that the administrator does the back office services, which I will describe these services throughout my blogs. One of the tasks we do, and my recent project, is to input and record all fees that go into the system to ensure the money in the hedge fund is being allocated to the correct people.
There are two main fees that may occur during each valuation period. The first, a management fee, is in place to help pay for everything it takes to run the fund; such as rent, utility costs, salaries for the manager, commissions for brokerages, lawyers and accountants that help run the fund. This fee is usually 1-2% of assets. The other fee, a performance fee, is known as an incentive fee. This is usually a 20% fee that is charged on investment returns. This fee is usually where managers make their money; however it only goes into effect if the current valuation period has surpassed the high water mark. If a fund does well one valuation period, a high water mark, or HWM is set in. If a fund did poorly the next valuation period and its price per share is lower than that of the HWM, a performance fee cannot be charged.
My current project pertains to performance fees. Recently, a fund transferred to Equinoxe to be its administrator. Using the information we have from a transfer agency, I have been placing all the relevant data to the fund in our system. I have been inputting the investors, all of their activity and the HWM for each valuation period the fund had been active prior to using Equinoxe as its administrator. “All other activity” as I stated, is basically subscriptions (putting money into the fund), transfers (moving money from one investor to another), and redemptions (taking money out of the fund) of each investor, and let me tell you, there’s a lot of investors and even more activity! There are strict procedures that are in place that make some of this difficult to do. One vital procedure that we do is the fact that everything I do must be reviewed and approved to make sure everything is correct, by either an account manager or a group manager. Some things such as setting the HWM requires the approval of at least an account manager and a group manager. This is because we absolutely must make sure we don’t input even a single wrong number as it could result in millions of dollars being misplaced (and I would rather that not happen!!).
Until next time,