What is a success fee?
What is a high water mark?
How do you calculate the success fee?
How much is the success fee?
What benchmarks do you compare your performance to?

A Matter of Principle

Studies show that in 2019, 71% of large-cap US actively managed equity funds underperformed the S&P 500, according to the S&P Dow Jones Indices' SPIVA (S&P Indices Versus Active) Scorecard. Over the past five years, almost 81% of large-cap, active US equity funds underperformed their benchmarks - S&PGlobal
Overperforming is hard, but that doesn’t mean you should pay fees regardless of performance. At Unhedged, we’re confident our algorithms will outperform their benchmarks enough to put our money where our mouth is with a success fee.

Success fees (or performance fees) are quite common in investing when you’re talking big money, but not typically for everyday investors. We believe this is unfair and want to show how things can be done differently.

'Performance Hurdle' & 'High Water Mark'

The success fee is charged only on days when the return of an algorithm exceeds the performance hurdle AND the high water mark.

The performance hurdle is when the algorithm exceeds the performance of its comparable benchmark on any given day. Our aim is to beat the market.

A high water mark is the highest historic value the algorithm has achieved, ever.

A success fee is only charged if the algorithm exceeds both the performance hurdle and high water mark on any given day. On days we do not achieve these two targets, we charge you nothing.

The Calculation

In our backtests, our algorithms exceeded the performance hurdle and the high water mark between 18% and 45% of days a year. That equates to an estimated success fee range between 0% and 1.61% per annum.

The success fee = (% return of the algorithm - % return of the benchmark) * 20% only on days when the performance hurdle and a new high water mark are exceeded.
Some examples

Performance and Success Fee Graph
Day 1: Investment grows, but not by enough
The value of an algorithm increases to $1,010, this is an increase of 1.0% compared to yesterday.
The value of the benchmark increases to $1,012, this is an increase of 1.2% compared to yesterday.
Although the investment increases in value, the algorithm doesn't outperform the benchmark return
Performance hurdle not achieved. Success fee = 0

Day 2: Investment dips
The value of an algorithm decreases to $1,005, this is a decrease of 0.50% compared to yesterday.
The value of the benchmark decreases to $1,004 this is a decrease of 0.79% compared to yesterday.
Although the algorithm decreases less in value compared to the benchmark, it doesn't hit a new high water mark.
No new high water mark was achieved. Success fee = 0

Day 3: Investment grows, but is still recovering losses
The value of an algorithm increases to $1,008, this is an increase of 0.30% compared to yesterday.
The value of the benchmark increases to $1,006, this is an increase of 0.20% compared to yesterday.
Although the investment increases in value, and outperforms the benchmark, it doesn't hit a new high water mark.
No new high water mark was achieved. Success fee = 0

Day 4: Investment grows more than the benchmark AND reaches a new all time high!
The value of an algorithm increases to $1,012, this is a 0.40% increase on its value yesterday, a new high water mark.
The value of the benchmark increases to $1,009, this is a 0.30% increase on its value yesterday
The investment increases in value, meets the performance hurdle AND reaches a new high water mark!
Success fee = 20% of (Return portfolio – Return benchmark) = 20% of (0.40% - 0.30%) = 0.02%
On a portfolio of $1,012 this equates to $0.20

Benchmarks
Each algorithm has a different strategy and trades in different asset classes. This also means that the benchmark we use for each algorithm varies.
Benchmarks
Note that the success fee is not charged for any value you hold in cash.

Links to related articles:
Fees to Invest with Unhedged
Impact of Buy/Sell spread
Tax
Performance of Unhedged

Information contained here is prepared by Unhedged Pty Ltd ACN 646 421 730 (AR 001288751) an authorised representative of Cache Investment Management Pty Ltd ACN 624 306 430 AFSL 514 360. Units in the Unhedged Fund are issued by Melbourne Securities Corporation Limited (ACN 160 326 545 AFSL 428 289). All information is general information only and doesn’t take into consideration your personal circumstances, financial situation or needs. Before making a financial decision you should understand the risks and read the relevant PDS and TMD and consider whether the product is right for you and seek advice if necessary. Any information contained here may have been automatically generated by an algorithm based on raw data inputs and has not been independently verified and is subject to change. Past performance is not indicative of future performance. Unhedged Fund APIR Code: UPL9838AU International Securities Identification Number (ISIN): AU60UPL98384. Copyright (C) 2022 Unhedged. All rights reserved.
Was this article helpful?
Cancel
Thank you!