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Fund Accounting Process Flow

on December 05, 2020

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Crystallization of fees

Investors typically pay an "incentive fee" to the fund manager to account for profit made by the fund and allocated to investors. Typically this is charged as a percentage of profit, such as 20%. The fee is generally charged quarterly or yearly. If the fund's allocation period is shorter than the fee period, the fee is accrued over several allocation periods. The fee is said to be uncrystallized as it accrues. If the investor redeems capital during the fee accrual period, this may affect the amount of its incentive fee. To make sure that it receives all of the incentive fee due to it, the fund can require the investor to pay a portion of its management fee whenever it redeems capital. This is referred to as crystallizing the fees.

Introduction to captstock

Capital Stock (Capstock) refers to the share base of the fund i.e. the number of shares held by the investors. There are 3 main Capstock transactions: subscriptions, redemptions and distributions. Capstock transactions: Subscriptions/Creations – represent a purchase of capital stock shares/ units. Subscription increases amount of money held by the fund and the number of shares outstanding (i.e. the number of shares owned by investors). Redemptions/ Liquidations/ Cancellations – a person sells their shares back to the fund. Shareholder receives the current per share value for each share owned. Redemption decreases amount of money held by the fund and the number of shares outstanding. Distribution – fund distributes net income to shareholders based on number of shares they hold. Distribution decreases the amount of money held by the fund. A shareholder may elect to receive the distribution in cash (based upon a pre-determined distribution rate) or may elect a reinvestment. Reinvestme

What is crystallization in hedge funds?

The crystallization frequency or incentive fee payment schedule refers to the frequency with which investors have to pay the incentive fee to the hedge fund manager. It is also the point in time where the hedge fund updates the high-water mark.

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Fund Accounting Process Flow

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