The performance fee is a percentage of the amount an Investor pays to a Portfolio Manager (PM) for profitable investments after a billing period. Below are detailed formulas and explanations to help you understand how the performance fee is calculated.

Performance fee formula

The performance fee, calculated as a percentage of the incremental profit, is the difference between investment profit and profit threshold, which indicates how much profit has grown during the given billing period compared to the previous peak.

Fee for the current period =  (Profit since inception - Profit threshold) * Fee rate

Profit since inception - the sum of results for closed and open orders from the start of the investment until the end of the current billing period or until the investment is closed.

Profit threshold - the highest peak in profit at the end of the billing period that the investment has reached since inception. It is established at the beginning of the billing period.

Fee rate - the percentage of investment profit that should be paid to the PM.

At the end of every billing period, we compare profit since inception to the previously set profit threshold. If the profit is greater, this higher value is assigned as the profit threshold for future periods.

Note: If profit since inception is lower than the profit threshold, there will be no incremental profit for a given period, and the performance fee will not be charged.

Calculation example (1):

1. A performance fee rate is set at 10% by the PM.
2. An Investor invests in a fund with 3 000 USD.
3. During the first billing period, the Investor receives a profit of 400 USD.
   1. At the end of the billing period, the PM gets 40 USD.
   2. The investment equity is now 3 360 USD.
   3. Since this is the first billing period, there is no profit threshold; thus, the incremental profit is calculated as:

400 USD - 0 USD = 400 USD.

4. The performance fee will calculated as:

400 USD x 10% = 40 USD

5. The fee will be transferred to the PM’s account.

4. By the end of the next period, the investment suffers a slight loss of 50 USD.
5. This makes the current investment profit 350 USD, while the profit threshold is now 400 USD (previous profit).
6. Since the profit threshold is higher than the investment profit, there is no incremental profit for this period, and no performance fee will be paid to the PM.

Calculation example (2):

Let’s look at the performance fee rate calculation in action for five months.

Let’s assume an investment begins with an equity of 1000 USD and a fee rate of 10%.

At the end of every billing period, we use the formula:

Fee for the current period =  (Profit since inception - Profit threshold) * Fee rate

Remember, if profit since inception is lower than the profit threshold, there will be no incremental profit for a given period, and the performance fee will not be charged.