Terms
Fee discussions usually collapse into a single number, and the number is usually the wrong thing to argue about. A two per cent management fee is cheap if the strategy genuinely requires that infrastructure and expensive if it funds a lifestyle. What determines whether a manager's incentives point in the same direction as ours is the structure, not the rate.
Management fees and the breakeven question
We look at the management fee as a business input rather than a cost line. What we want to know is the firm's annual operating budget, what proportion of it the management fee covers at current assets, and therefore how much asset growth the firm needs to be stable. A manager whose fixed costs are covered can afford to close to new capital at the right moment. A manager who is not yet at breakeven cannot, and will take assets past capacity because the alternative is closing the firm.
This is why we are relaxed about a higher management fee on a small fund and much less relaxed about the same rate on a large one. Beyond a certain size, the management fee stops paying for the business and starts paying for something else.
Performance fees: hurdles, high-water marks and crystallisation
A performance fee charged on returns that a treasury bill would have delivered is not a performance fee. Where the strategy's risk-free alternative is meaningful, we expect a hurdle that reflects it. For strategies with substantial market exposure, we are interested in hurdles defined against the relevant exposure rather than against zero.
High-water marks should be permanent and should not quietly reset when a fund is restructured, a share class is rolled, or a manager launches a successor vehicle. We read the provisions that govern those events carefully.
Crystallisation frequency matters more than most investors notice. Annual crystallisation on a volatile strategy can pay substantial fees on gains that reverse a month later. Multi-year crystallisation, or a clawback, aligns the manager's realisation with ours.
Expenses
The expense schedule frequently contains more economics than the fee schedule. We want a clear line between costs properly borne by the fund — audit, administration, trading, financing — and costs properly borne by the management company, including staff, research subscriptions, office space and marketing. Where research and data costs are charged to the fund, we expect a policy and a cap.
Alignment beyond fees
The strongest alignment signal is personal capital. We ask what proportion of the founder's and senior team's liquid net worth sits in the strategy, on the same terms as external investors and without a separate liquidity arrangement. We also ask how the team below the founder is paid: a firm where junior investment staff are paid from a discretionary pool with no deferral has a different risk culture from one where compensation is deferred into the fund.
What we offer in return for better terms
We do not simply ask for discounts. Where we seek founder terms or fee concessions, we bring size, a longer commitment, a willingness to accept a lock-up appropriate to the strategy, and a stable presence during periods when other investors are redeeming. In our experience managers value the last of those most.