Hi,
It is stated in the paragraph: “Bonus-style fees are the close equivalent of a manager’s call option on a share of active return, for which the base fee is the strike price”. I think we can understand the fee here as the payoff in option. So, the base fee is not the strike price, but the active return at 0.25% is.
Could anyone help me explain this one?
Best,
Take note that in this context, the performance fee is based on the active return net of base fee. If the sharing % is 20% and Base Fee = 0.25% say, then
Performance fee
= 20% x Max(0, Active Return - Base Fee)
= 20% x Max(0, Active Return - 0.25%) <— Payoff of Call Option on Active Return (X = Base Fee)
If the Active Return < Base Fee, then there is no performance fee.
If Active Return > Base Fee, then performance fee is paid.
So we can understand the base fee as the minimum level of active return that needs to be achieved, in order for a portfolio manager to receive a performance fee.
Thanks, it is clear now.
