Fee Type Hidden Lake Carpenter Management
Base Fee 0.30% 0.18%*
Sharing** 15% 20%
Max Ann. Fee N/A 0.80%
**On active return, beyond base fee
CFA Question: Identify which manager’s fee structure is most similar to a call option on a
share of active return. Justify your selection.
CFA Answer: Carpenter Management has a bonus-style fee with a maximum fee feature. 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—for example, the 18 bps base fee,
plus a long call option on active return with a strike price equal to the minimum
(base) fee, minus another (less valuable call option) with a strike price equal to the
maximum fee. Hidden Lake has a symmetrical fee structure in which the manager
is fully exposed to both the downside and upside. So, of the two firms, Carpenter
Management’s fee structure is most similar to a call option.
- Why is it not Hidden Lake? Call options have unlimited upside as far as I know.
- What about Hidden Lake fees is symmetrical? Only the small 0.3%, versus 15% of active return on the upside. Seems very asymmetrical to me. And how is the manager “fully exposed” to upside and downside? They get 0.30% no matter what, and 15% if things go great…I dont get it