Institutional Investors have questioned the practice whereby Hedge Fund Managers "bank" their incentive compensation every year or every quarter. Investors with multi-year exposure bear more risk than the Manager, and pay incentive compensation at a rate greater than the agreed upon rate. (To view an illustration of this problem, please click here)
CalPERS summed it up this way:
"The present model provides the possibility of a hedge fund manager realizing a 20 percent performance fee at the end of a bonanza year. If the fund suffers a significant decline the next year, the manager could still have a large net gain at the end of the two years, but the investor may break even or even lose money." --Press Release March 27, 2009
The FAR® Fund Program
Instead of annual banking of incentive compensation, a FAR® Fund provides incentive compensation in the form of Fund Appreciation Rights (FAR®). A FAR® provides a Manager with an agreed upon share of the cumulative profit over the agreed upon multi-year Performance Period. If a Manager receives a 20% FAR® then the FAR® will deliver exactly 20% of the cumulative profit over the agreed upon Performance Period. The Investor is thus assured 80% of the cumulative profit over the agreed-upon Performance Period. In essence, the FAR® provides the Investor with an inherent "claw back" benefit. The Manager earns a reward only if there is a profit at the end of the Performance Period. (To view an illustrations of how FAR®s align Managers with Investors' long-term interest, please click here)
Investor Benefits-
- Multi-year cumulative compensation for commitment term
- Side-by-side investment of Manager's capital
- Interim rebalancing liquidity
- Transparency of compensation timing (e.g. "insider stock sale")
- Manager sustainability & stability
Manager Benefits-
- Attract significant capital from long-term, like-minded Investors
- Business flexibility enhanced by access to tax-deferred pool of capital
- Key employee attraction and retention with tax-deferred wealth accumulation
Bottom Line: No other incentive compensation method is as powerful an alignment solution as The FAR® Fund Program, restoring a "true partnership"
For FAR® Fund Program details, please contact:
Thom Young, (704) 731-5432, Email - Jim Christian, (704) 731-5973, Email
Brad Barrett, (704) 731-5972, Email - Leif Lundberg, (704) 731-5995, Email
