Adam Tracy (Adam S Tracy) Explains Crypto Hedge Fund Fees
Cryptocurrency hedge fund formation attorney Adam S. Tracy explains fee structures for bitcoin and cryptocurrency based hedge funds and investment funds.
The hedge fund. What do I charge people right I get all the time. What do I charge people? What do I charge? Well traditional hedge funds? Okay, traditional heads hedge funds which are 1 to 2% as a management fee and then 20% as what’s called an incentive allocation. Okay, let’s talk about the management fee management fee is a fee that’s intended to cover the manager of the fund managers overhead.
So like salaries rent whatever overhead and typically in a traditional context wanted to percent is that monthly fee and how it works as one of two ways. It’s Plated in paid in advance of the month, right or it’s paid one month in arrears meaning it’s 1% So if you had $100,000 assets under management, you take 1/12 of 1% times 100,000 and that would either be paid at the front end of the month or one month in a rear is at the beginning of that month, right? And again, it’s meant for to cover overhead. It’s not meant to be sort of a profit Center. So 1 to 2% is always been been the norm now startup hedge funds are well advised to keep that lower.
Okay in the sense that it presents a barrier to entry to somebody wants to invest in your phone. Okay, so you don’t want to come at people with you know, a 3/4 percent because it doesn’t necessarily give them a reason to invest or get into your fun. Especially in the early stages. Now, the incentive allocation is a little bit different because it’s performance-based, right? Okay, and so Typically, its twenty percent of the profit that that fund earns. Um, and that’s pretty standard now in the crypto space because of one liquidity issues to because it’s a very nuanced and sort of specific area. Right I’ve seen a lot of funds do well charging 3035 percent, right and that’s high but given the Alternatives it’s really your only chance for exposure.
Right so you can justify it in certain certain contacts, but you know as an investor, I would look to see what what that fund is actually doing right? I mean, what are they doing? Are they just pimping icos or are they you know, they have some algorithmic or quantitative trading strategy that has a proven track record and you could substantiate, you know, parting with 35 percent of the profit that you otherwise would be entitled to as a limited. Hedge fund okay.
So from you know my vantage point as one who sets up hedge funds. Okay. I think you start, you know initially, especially when you consider the limitations of a start-up hedge fund, right, you know, the 3 C1 exemption of the Investment Company act limits you to 100 accredited investors. So you’re only going to get to a certain level and you can only take that incentive allocation from accredited investors, so they have to be in credited. Well, you know, I would be wary of taking fees that that sort of vary from the norm right an accredited investor may have exposure to traditional product hedge funds and may be accustomed to in 20% I wouldn’t fear drastically from that, uh, mainly because you’re competing with the ecosphere of of you know, hedge funds Financial products whether it’s debt Equity swaps options, You name it and you’re not and you’re also competing with the varied strategies, you know, high-frequency long short, whatever the case may be.
So you have to consider that right when you’re starting a fondant when you’re investing in a van. You also have to consider that so my I guess my message is sort of coming from not only for spective of an attorney who’s you know, advising you on on how to maybe set up a fund but also as an investor or maybe you’re a fund to funds right and then this is sort of relevant on both ends. But um generally speaking I like to keep the management fees low in the incentive allocation higher right especially because the performance-based aspect of it in numerous to more investor confidence and it’s a lower presents lower barrier to entry so, you know, the question is what do I try to people?
Well you can charge them whenever you want in theory, right as long as it’s properly disclosed in your offering memorandum, and it’s a properly accounted for In theory, you could charge whatever you want.
But again your marketing, right? This goes back down to marketing and there’s limited funds out there and you know people want exposure to crypto. So maybe they’re willing to pay a little bit more on that incentive allocation. But I keep the management fees low. That’s my advice. I would say don’t Veer from the norm and you know, go to three four percent just because you have an illiquid asset writing crypto. I don’t think that or you have higher transaction fees versus Equity. I don’t think that makes sense. I think what you have to do is overcome the barriers to entry which is that that fee right and I’m an investor saying well, I’m going to put in $100,000 but four percent of it goes out the door right away and the first year right just to you know, pay your salary.
I think that the Optics are poor. So I think keep that more in line with what your additional funds are to try to bring money into your fund and then increase it may be on the incentive allocation side because you have specialized knowledge if you are in fact running like a High frequency quantitative trading hedge fund that’s based on cryptocurrency. Then you have a skill that very few people do in fact have so um, you know, the answer to the question in the link very very brief answers really whatever you want to charge but I’d be very cautious and you know concerned about the Optics of it and your ability to raise invest your funds given, you know, that that management fee expecially so hit me up. Uh, I’m on uh, well, I’m on everything I guess but how about telegram at Adam underscore Tracy know, uh, follow me?
A former competitive rugby player, serial entrepreneur and, trader attorney, Adam S. Tracy offers over 17 years of progressive legal and compliance experience in the areas of corporate, commodities, cryptocurrency, litigation, payments and securities law. Adam’s experience ranges from commodities trader for oil giant BP, initial public offerings, M&A, to initial coin offerings, having represented both startups to NASDAQ-listed entities. As an early Bitcoin adapter, Adam has promoted growth of cryptocurrency and offers a unique approach to representing crypto-clients. Based in Chicago, IL, Adam graduated from the University of Notre Dame with dual degrees in Finance and Computer Applications and would later obtain his J.D. and M.B.A. from DePaul University. Adam lives outside Chicago with his six animals, which is illegal where he lives.