Here’s one illustration I often use assuming fees are 0.2%/year of assets + 20% performance fee, and the account is worth $100 on December 31st.
All the below illustrations assume you did not deposit or withdraw any money from the account over the course of the year, and are for illustration purposes only, with no guarantee of actual market returns.
These returns are deliberately assumed to be more volatile than they often are for the conservative investment strategy for illustration purposes.
By March 31st, the account has grown in value to $110 from dividends and stock appreciation, net of the ~$0.05 taken out as the % of assets fee. On that quarterly anniversary, $2 (20% * the $10 increase from $100 to $110) is charged as a performance fee, and the new account balance and “high water mark” is $108.
By June 30th, the account falls to $95, also assuming that’s after the ~$0.05 percent of assets fee charged that quarter. As performance was negative, no performance fee is charged.
By September 30th, the account recovers to $105 after another ~$0.05 percent of assets fee charged that quarter. Since this is still below the $108 “high water mark”, no performance fee is charged this quarter.
By December 31st, the account rises in value to $113 (again, net of the $0.05). On this quarterly anniversary, a $1 performance fee (20% * the $5 increase above the old high water mark of $108) is charged, leaving the new account balance and high water mark at $112.
So in summary, in this scenario, the account earned a gross profit of $15.20 and paid out $3 in performance fees and $0.20 in assets under management fees, for a net profit of $12 for the year. The 20% of profits is charged only when the account is valued above the previous highwater mark at the end of a quarter, otherwise, only the 0.2% per year is charged that quarter.
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