performance netting page 229 reading 34 book 5

CFA Level III
#1

" for any given level of net returns, its portion of fees will by definition be higher if all portfolio managers generate no worse that 0 performance over the period than it would be if some portfoilio managers generated losses"

Is not it backwards?

Assume a portfolio of 100m, slit into two 50m portfolio, each managers gets 10% of the returns

case A: manager a earns 10%, ie 5 million, he gets 0.5 out of it, and manager b earns 5 million and he gets 0.5 out of it, net return is 9/100 is 9%

case B: manager A losses 10% ie 5 million, he gets nothing, manager B earns 20% ie 15 million and he gets 1 million 1.5 out of it, net return is 8.5/100 =8.5%

so the fees were lower in the case of all above zero performance, which is the opposite of what cfa sais, what am i missing?

#2

you calculated case B wrong didn’t you?

Net return = -5 + 5 -1 / 100 = -10%

Manager A LOST 5 Million.

#3

humm, i dont see what you mean, in case b

manager a lost 5, b earned 15, net is 10 yeou said, but then you take out 1.5 as the fees for manager b…

the point being so far it seems like CFA said it backwards?

#4

You are looking at a case where the fund made money.

Look at it when A lost 10%, B gained 10% - so Fund gained nothing. At that time, however fund still needs to payout Manager B’s performance fees.

#5

but i am specificly doing what the quote sais, comparing all positive performance with some negative performance and same total return…

#6

the idea about performance netting is - to have a performance based fee based on entire company results and not on individual manager results.

They do discuss in the book about what the impact is and the example given is one of one person having a positive performance the other a negative performance of the same amount - so the firm as a whole has no profits, but has to pay out to the positive performing manager, and hence the whole firm suffers.

This provides incentives - similar to a call option - where manager has no motivation to do well, but if he does well, he’ll take more risks. while the poorly perfoming manager just does not do anything.

#7

yeh thanks i get that, but still not get what cfa is saying in the quote from my first post

they said that for a given return teh fees will be higher when all the sections of portfolio had positive return, while in fatc they would be higher when some had negative returns cause someone else is going to have to compensate for that negative, and they will get paid a percentage out those earning…

anyway, if i cant make it clear, forget about it, no biggy, many thanks

#8

"for any given level of net returns, its portion of fees will by definition be higher…"

Here “its portion of fees” is what the hedge fund paid to the portfolio managers, while the net returns is what the hedge fund got.

#9

^ okay, at it pays more to portfolio managers when some are negative, and not when all are positive, for an equal total return…