Incentive allocation by year
Five ways to split a trading result between investors and the GP: no hurdle, a 7% soft hurdle, a 7% hard hurdle, a first-loss account and a locked fee class, plus how a multi-manager platform pays its traders. Every assumption moves.
Six years of an open-ended fund at 2 and 20 with a high-water mark. The path includes a sub-hurdle year, a drawdown, a recovery and a year inside the soft hurdle's catch-up zone. Edit any year.
Investor net return for each structure at gross returns from -30% to +40%, using the terms set above and in each study below. The soft hurdle's catch-up zone is the steep segment just above the hurdle.
The GP posts capital that absorbs the first losses; in exchange it takes a large share of gains instead of a 2/20 fee. The investor holds a senior tranche; the GP holds levered equity in its own track record. Compared with 2/20 on the same path.
Year 3 loses 14%: the cushion takes the first 10% of starting capital, the investor the rest.
Class A pays full fees for quarterly liquidity. Class B pays less for a one-year hard lock. The investor's saving is the GP's cost; the GP's return is capital that cannot leave in a stress year and twelve months of fee visibility.
Fund size $250M. Investor view uses the hurdle study's return path.
Below the breakeven, the discount costs the GP more than the lock saves. The cells do not depend on fund size or the Class B share.
Five trader books, each paid on its own P&L. In a mixed year winners are paid while losers' losses stay in the fund. The structure decides who absorbs that netting gap and the platform's salaries: the manager or the investors.
Fund size $250M. Costs cover salaries, technology, data and rent; illustrative.
With a full catch-up it costs the GP nothing once the net return clears ; it only removes incentive in modest years. A hard hurdle gives up of NAV in every year above the hurdle.
No structure pays until losses are recovered. The hurdle base then sets how much further NAV must climb, a point worth fixing in the offering documents before an allocator asks.
Investors net more under first loss below a gross return of and are protected from the first losses; above it, 2/20 is cheaper. It suits traders without a long record.
A traditional fee leaves the manager paying winning traders out of a net result; pass-through hands that gap and the payroll to investors, who increasingly test how much of gross performance they keep.