Contrast the main forms of investment manager contract, covering their key provisions and their advantages and drawbacks
The idea
Contracts differ mainly in how the manager is paid. Ad valorem fees, flat or tiered by asset size, are simple and predictable and do not reward risk-taking, but they pay the manager whether or not value is added and encourage asset gathering. Performance-based fees tie pay to results, aligning interests and lowering cost in poor years, but create option-like incentives to raise risk, can reward luck or beta, and make fees volatile and complex. Key provisions to compare include the base fee, the share of excess return, the benchmark or hurdle rate, high-water marks, fee caps and floors, clawbacks, the measurement period and crystallisation frequency. Sound contracts also specify mandate guidelines, liquidity and reporting obligations, and termination terms.
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