Explanation of Fund Performance Fee and Equalisation
Reasons for Equalisation
Since each investor subscribes at different times and at different cost prices, to ensure fairness when calculating the Performance Fee, the fund calculates an Equalisation for each investor. This reflects the difference between the investor's cost price and the current High Water Mark.
Its core function is:
To indicate whether the investor should be refunded or needs to make an additional performance fee payment for the current quarter.
The Equalisation is included in the fund's total asset value and is used at the end of each quarter to determine the performance fee shares to be refunded or deducted.
1. What does a positive Equalisation mean?
If the Equalisation is positive:
It means the investor's subscription cost is higher than the current High Water Mark.
It indicates that the investor has already "overpaid" a portion of the performance fee based on the cost price.
At the end of the quarter, when the performance fee is formally calculated, this amount should be refunded to the investor in the form of additional shares. Simple understanding: Positive = Overpaid, should be refunded.
Example:
Price Changes
Current High Water Mark (starting point for performance fee calculation): 1
Client A's purchase cost price: 1.2
Fund price at quarter-end: 1.4
Performance Fee Calculation The fund company calculates the performance fee based on the gain (1.4 - 1), meaning Client A is charged: 100 shares × (1.4 - 1) × 20% = 8
However, Client A's actual cost is 1.2. The gain between 1 and 1.2 is not Client A's actual profit and should not bear the performance fee.
The overpaid performance fee is:
100 shares × (1.2 - 1) × 20% = 4
Processing Method At the end of the quarter, the overpaid $4 must be converted into fund shares and refunded to Client A.
2. What does a negative Equalisation mean?
If the Equalisation is negative:
It means the subscription cost is lower than the current High Water Mark.
If the fund price increases, in addition to the normal performance fee, the investor needs to make up for the performance fee corresponding to the difference from the cost price to the High Water Mark.
At the end of the quarter, this will be realized by deducting shares.
Simple understanding: Negative = Underpaid, needs to be supplemented.
Example:
Price Changes
Current High Water Mark (starting point for performance fee calculation): 1
Client A's purchase cost price: 0.8
Fund price at quarter-end: 1.4
Performance Fee Calculation The fund company calculates the performance fee based on the gain (1.4 - 1), meaning Client A is charged: 100 shares × (1.4 - 1) × 20% = 8
However, Client A's actual cost is 0.8. The performance fee from 0.8 to 1 was not borne by the client and needs to be recouped.
The underpaid performance fee is:
100 shares × (1 - 0.8) × 20% = 4
Processing Method At the end of the quarter, the underpaid $4 must be converted into fund shares and deducted from the client's account.
3. How is the final settlement processed at the end of the quarter?
At the end of the quarter, the system executes based on the day's net asset value and the final Equalisation value:
Positive Equalisation → Refund corresponding shares
Negative Equalisation → Deduct corresponding shares
If the Equalisation is not fully realized in the current quarter (i.e., the fund's performance is insufficient to reach the theoretical value), the unrealized portion is automatically carried forward to the next quarter for continued calculation.