Managed fees consist of the following two components:
- Performance or Incentive Fee – This is the most common cost associated with a managed account. It is calculated on either a monthly or quarterly basis based on NEW profits generated in the account. This fee can typically range between 20 to 50%.
- Annual Management Fee – This is a fee that is quoted as an annualized percentage and charged usually on a monthly basis (1/12 of the annual fee charged every month). This can commonly range from 1% to 3% when it is charged (but may be higher at times).
Managed Fee Calculation Example
Let's say that a managed account fee structure is 2 / 40. This means that the program costs consist of a 2% management fee and 40% performance fee. Let's say that a new investor starts with $100,000 and has an account balance of $108,000 at the end of the first month. His total fees will be as follows:
- 40% of the total new profits; i.e., 0.40 x $8,000 or $3,200 and;
- 1/12 of 2% of the starting balance of $100,000, which equates to one-month of management fees, or $166.67.
As a result of the fees above, the investor's total cost for that month will be $3,366.67. His end-of-month account balance (net of fees) will thus be $104,633.33.
How do these Costs Compare to Other Professionally Managed Products?
Managed account fees are similar to that of hedge funds, but usually a lot higher than mutual funds. This may seem unfair to the traditional investor, but it's really quite normal. Given the fact that most mutual funds do not outperform the market averages (read Managed Account vs Mutual Fund – Which is Better?) and that managed accounts are typically a lot more actively managed and have higher return objectives than their mutual fund counterparts, relatively higher costs for managed accounts are fair and justified.
Two good examples of actual fee structures that may seem exorbitant to the untrained eye are, Steven Cohen of SAC Capital Advisors, who charges a 3%-management fee and a a 50% performance fee and Jim Simon's Renaissance Technologies, whose fund charges a whooping 5% management fee and 44% incentive fee.