In the investment advisory industry, a management fee is a periodic payment that is paid by an investment fund to the fund's investment adviser for investment and portfolio management services. Often, the fee covers not only investment advisory services, but administrative services as well. Usually, the fee is calculated as a percentage of
assets under management.
In manage property sector, is also used. Usually under management contract. Is used for running hotels, and restaurants.
Mutual funds
In a
mutual fund
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICA ...
, the management fee will include any fees payable to the fund's investment adviser or its affiliates, and administrative fees payable to the investment adviser that are not included in the "Other Expenses" category. Management fees paid to mutual funds and other registered investment companies are set forth in the advisory agreement which must be approved by the fund's board and shareholders; in general, these fees are heavily regulated under the Investment Company Act of 1940.
[Lemke, Lins and Smith, ''Regulation of Investment Companies'', §7.11 and §9.09 (Matthew Bender, 2013 ed.).]
Private equity funds
In a
private equity fund
A private equity fund (abbreviated as PE fund) is a collective investment scheme used for making investments in various equity (and to a lesser extent debt) securities according to one of the investment strategies associated with private equity ...
, the management fee is an annual payment made by the limited partners in the fund to the fund's manager (e.g., the
private equity firm
A private equity firm is an investment management company that provides financial backing and makes investments in the private equity of startup or operating companies through a variety of loosely affiliated investment strategies including lev ...
) to pay for the private equity firm's investment operations.
[Private equity industry dictionary]
. CalPERS
The California Public Employees' Retirement System (CalPERS) is an agency in the California executive branch that "manages pension and health benefits for more than 1.5 million California public employees, retirees, and their families".CalPERSFa ...
Alternative Investment Program
Often the management fee is initially based on the total investor commitments to the fund (i.e., the fund size) as investments are made. After the end of the commitment period, ordinarily 4–6 years, the basis for calculating the fee will change to the cost basis of the fund, less any investments that have been realized or written-off.
Management fees rates will range from 1.0% to 2.0% per annum during the initial commitment period and will then often step down by 0.5–1.0% from the original rate through the termination of the fund.
Typically, the managers will also receive an incentive fee based on the performance of the fund, known as the
carried interest
Carried interest, or carry, in finance, is a share of the profits of an investment paid to the investment manager specifically in alternative investments (private equity and hedge funds). It is a performance fee, rewarding the manager for enhanc ...
.
Hedge funds
In a
hedge fund
A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as ...
, the management fee is calculated as a percentage of the fund's
net asset value
Net asset value (NAV) is the value of an entity's assets minus the value of its liabilities, often in relation to open-end, mutual funds, hedge funds, and venture capital funds. Shares of such funds registered with the U.S. Securities and Exc ...
(the total of the investors' capital accounts) at the time when the fee becomes payable. Management fees typically range from 1% to 4% per annum, with 2% being the standard figure. Therefore, if a fund has $1 billion of assets at year-end and charges a 2% management fee, the management fee will be $20 million. Management fees are usually expressed as an annual percentage but both calculated and paid monthly (or sometimes quarterly or weekly) at annualized rates.
See also
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Mutual fund fees and expenses
Mutual fund fees and expenses are charges that may be incurred by investors who hold mutual funds. Operating a mutual fund involves costs, including shareholder transaction costs, investment advisory fees, and marketing and distribution expenses. ...
References
{{Private equity and venture capital
Private equity
Hedge funds
Investment management