Management fee
Encyclopedia
In the investment advisory industry, a management fee is a periodic payment that is paid by investors in a pooled investment fund to the fund's investment adviser for investment and portfolio management services.
, the management fee will include any fees payable to the fund's investment adviser or its affiliates, and administrative fees payable to the investment adviser that are not included in the "Other Expenses" category.
, the management fee is an annual payment made by the limited partners in the fund to the fund's manager (e.g., the private equity firm
) to pay for the private equity firm's investment operations..
Often the management fee is initially based on the total investor commitments to the fund (i.e., the fund size) as investments are made. After the end of the commitment period, ordinarily 4–6 years, the basis for calculating the fee will change to the cost basis of the fund, less any investments that have been realized or written-off.
Management fees rates will range from 1.0% to 2.0% per annum during the initial commitment period and will then often step down by 0.5% - 1.0% from the original rate through the termination of the fund.
Typically, the managers will also receive an incentive fee based on the performance of the fund, known as the carried interest
.
, the management fee is calculated as a percentage of the fund's net asset value
(the total of the investors' capital accounts) at the time when the fee becomes payable. Management fees typically range from 1% to 4% per annum, with 2% being the standard figure. Therefore, if a fund has $1 billion of assets at year-end and charges a 2% management fee, the management fee will be $20 million. Management fees are usually expressed as an annual percentage but both calculated and paid monthly (or sometimes quarterly or weekly) at annualized rates.
Mutual funds
In a mutual fundMutual fund fees and expenses
Mutual fund fees and expenses are charges that may be incurred by investors who hold mutual funds. Running a mutual fund involves costs, including shareholder transaction costs, investment advisory fees, and marketing and distribution expenses...
, the management fee will include any fees payable to the fund's investment adviser or its affiliates, and administrative fees payable to the investment adviser that are not included in the "Other Expenses" category.
Private equity funds
In a private equity fundPrivate equity fund
A private equity fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with private equity....
, the management fee is an annual payment made by the limited partners in the fund to the fund's manager (e.g., the private equity firm
Private equity firm
A private equity firm is an investment manager that makes investments in the private equity of operating companies through a variety of loosely affiliated investment strategies including leveraged buyout, venture capital, and growth capital...
) to pay for the private equity firm's investment operations..
Often the management fee is initially based on the total investor commitments to the fund (i.e., the fund size) as investments are made. After the end of the commitment period, ordinarily 4–6 years, the basis for calculating the fee will change to the cost basis of the fund, less any investments that have been realized or written-off.
Management fees rates will range from 1.0% to 2.0% per annum during the initial commitment period and will then often step down by 0.5% - 1.0% from the original rate through the termination of the fund.
Typically, the managers will also receive an incentive fee based on the performance of the fund, known as the carried interest
Carried interest
Carried interest or carry, in finance, specifically in alternative investment management, is a share of the profits of a successful investment partnership that is paid to the investment manager of the partnership as a form of compensation that is designed as an incentive to the manager to maximize...
.
Hedge funds
In a hedge fundHedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
, the management fee is calculated as a percentage of the fund's net asset value
Net asset value
Net asset value is a term used to describe the value of an entity's assets less the value of its liabilities. The term is most commonly used in relation to open-ended or mutual funds because shares of such funds registered with the U.S. Securities and Exchange Commission are redeemed at their net...
(the total of the investors' capital accounts) at the time when the fee becomes payable. Management fees typically range from 1% to 4% per annum, with 2% being the standard figure. Therefore, if a fund has $1 billion of assets at year-end and charges a 2% management fee, the management fee will be $20 million. Management fees are usually expressed as an annual percentage but both calculated and paid monthly (or sometimes quarterly or weekly) at annualized rates.