By Jamie Walters of FCI
Friday, March 05, 2010 @ 5:37:17 PM EDT.
In the Credit Premium Program (CPP), the fee structure is as follows:
| Management Fee: 1% |
| Incentive Fee: 25% |
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Consider the following example for CPP.
Start Date: First day of the month.
Initial account value: $50,000
On the first day of the month we take a management fee of 1/12 of 1% from the beginning of the month account balance of $50,000. Thus, FCI would take $42.00 for management fees from a $50,000 funded account. This management fee is for the starting month.
Let’s say that the monthly return for CPP before incentive fees is 5%, for example. This means that the account value has grown by 5% from $50,000 to $52,500 by the start of the next month before incentive fees. Just to be clear, a 5% monthly return before incentive fees is calculated as:
($52,500 – $50,000) / $50,000, and not as ($52,456 – $49,958) / $49,958. In other words, the beginning-of-month account balance used in calculating the return for the month is not net of the management fee that is withdrawn at the beginning of the month.
On the beginning of the second month, we would take 25% of the profit added to the account from the prior period as incentive fees. Thus, we would collect $625 (= 25% of $2,500) on the beginning of the second month as incentive fees. This leaves the client account at an opening balance of $51,875 (= $52,500 – $625.00) for the first day of the second month.
On the first day of the second month we take a management fee of 1/12 of 1% from the beginning of the month account balance of $51,875. Thus, FCI would take $43 for management fees from a $51,875 beginning-of-period account balance on the first day of the second month. This management fee is the management fee for the second month.
The balance of $51,875 for the start of the second month is the new high-water mark for the account as of the first day of the second month. This means that FCI will not collect any incentive fees from the account at the end of the second month (first day of month three) unless the ending account balance on the last day of the period is above the high water mark of $51,875.
Note that in this example, the account experienced no additions or withdrawals of funds by the client. In addition, the account was started at the beginning of a period; in this case, at the beginning of the first month, and thus, no time-weighting is involved.
In the Option Selling Strategy (OSS), the fee structure is as follows:
| Management Fee: 2% |
| Incentive Fee: 20% |
Consider the following example for OSS.
Start Date: First day of the month
Initial account value: $50,000
On the first day of the month, we take a management fee of 1/12 of 2% from the beginning of the month account balance of $50,000. Thus, FCI would take $83.33 for management fees from a $50,000 funded account. This management fee is for the first month.
Let’s say that the monthly return for OSS before incentive fees is 5%, for example. This means that the account value has grown by 5% from $50,000 to $52,500 by the start of the second month before incentive fees. Just to be clear, a 5% monthly return before incentive fees is calculated as
($52,500 – $50,000) / $50,000, and not as ($52,412.50 – $49,916.33) / $49,916.33. In other words, the beginning-of-month account balance used in calculating the return for the month is not net of the management fee that is withdrawn at the beginning of the month.
On the beginning of the second month, we would take 20% of the profits added to the account from the prior period as incentive fees. Thus, we would collect $500 (= 20% of $2,500) on the first day of the second month as incentive fees. This leaves the client account at an opening balance of $52,000 (= $52,500 – $500.00) for day one of the second month.
On the first day of the second month, we take a management fee of 1/12 of 2% from the beginning of the month account balance of $52,000 Thus, FCI would take $86.66 for management fees from a $52,000 beginning-of-period account balance on the first day of the second month. This management fee is the management fee for the second month.
The balance of $52,000 for the start of month two is the new high-water mark for the account as of the beginning of month two. This means that FCI will not collect any incentive fees from the account at the end of month two (on day one of month three) unless the ending account balance on the last day of the period is above the high water mark of $52,000.
Note that in this example, the account experienced no additions or withdrawals of funds by the client. In addition, the account was started at the beginning of a period; in this case, at the beginning of the month, and thus, no time-weighting is involved.
Be advised that because FCI receives Incentive Fees, it may be inclined to trade in a more speculative manner than if it received only a percentage-of-assets fee. Please refer to the disclosure documents for either OSS or CPP for more information at http://www.financialii.com/financial-commodity-investments/disclosure-document.html
FCI would like to bring to your attention that there are substantial risks involved in trading futures and options on futures. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The volatile nature of the futures and high degree of leverage used in commodities may result in clients losing more than their original investment. Please consider carefully whether futures or options are appropriate to your financial situation.
