Performance fees are a type of fee that is based on the performance of a client’s portfolio. The better their portfolio performs, the more fees are paid. For example, if a client sees a return of $100,000 and a 20% performance fee is applied (typical rate for hedge funds) then they will pay $20,000 in performance fees.
The performance fee is a favourable model because it aligns interests between the money manager (or software provider) and the user. This is because the user only pays performance fees if they make money, and that fee is proportional to the amount they make.
With Tradeium, performance fees are only charged when a user’s portfolio rebalances at a new all-time high, in terms of total returns. On rebalances where your portfolio doesn’t reach a new all-time high in value, you will not be charged any fees. Performance fees are denominated and paid for in TRM tokens, at a predetermined rate.
Let’s take a look at a detailed example below, using real Tradeium performance fee calculations.
On the chart below, we have a rebalancing at point A, which was an all-time high return for the user at the time. There are no performance fees until the user’s total returns go back above the horizontal black line. In other words, no fees are applied when the returns fall below the highest point (at that time, point A).
Performance Fee Calculation for Move B
On rebalances where the user’s portfolio does reach an all-time high, new fees will be charged. One such rebalance occurs as the user’s returns rise from 1.860 to 2.043, labelled “B” on the chart above.
The fees for that particular rebalance - charged in TRM - are calculated as follows:
currentRet = The current return after the rebalance is completed.
retATH = The highest return as of the end of the previous rebalance.
Rate = The number of TRM charged for each 1.00 USDT made above all time high returns.
Balance = The USDT balance value of the users portfolio after the last rebalance
Focusing on move B. Because a new all time high return was made, a performance fee applies. Assuming a balance of $1000, rate of 0.5, currentRet of 2.043 and retATH of 1.860.
= (currentRet/retATH -1) * rate * balance * (retATH/currentRet)
= (2.043/1.860 - 1)*0.50*1000*(1.860/2.043)
= 0.09838 * 0.50 * 1000 * 0.9104
= 44.96 TRM charged
Since each TRM costs $0.06 - $0.10, the performance fees would be 3-5% at the Performance Fee rate of 0.5 in the example above.
The Performance Fee will be applied after each rebalance if a new all time high was made.
If a user's TRM balance becomes negative, we will continue running the bot uninterrupted for 3 days to give time for the user to purchase TRM. After the 3 days with a negative TRM balance, the bot will be shut off.
To begin, we will start Performance Fees for Marginbot and charge a low rate of 0.1 (0.1 TRM charged for every $1 made above all time high returns) to test out the system. Later, we will apply a performance fee to Trendbot and increase Marginbots rate. Management fees will still apply but be reduced.