Performance Fee

The performance fee is a variable fee charged based on the vault's profitability. It rewards vault traders for generating positive returns above a predefined benchmark or hurdle rate. This fee aligns the interests of vault managers with those of investors by incentivizing good performance.

Key Characteristics:

Purpose: Encourages vault managers to achieve superior returns while aligning with investor goals.

Calculation:

Typically a percentage of the profits earned above a high watermark. The fee is only applied if the vault generates positive returns above the specified benchmark.

High Watermark: Ensures that performance fees are only charged on new profits and not on recovered losses from previous periods.

Example:

If the performance rate is 20%, the high watermark is $1,000,000, and the vault generates a $50,000 return on a $1,000,000 investment:

Profit above the high watermark = $50,000

Fee = 20% × $50,000 = $10,000

Performance Fee = New income * Performance Rate

Benefits for Investors:

Vault managers are incentivized to maximize returns. This protects investors by ensuring fees are only charged when returns exceed expectations.