Performance fees are what money DARWIN-providing traders get paid when they manage to generate profits for their investors.
What are they?
In order to align the incentives between traders and investors, the performance fees are charged according to the profits the DARWIN generates for the investors. Traders receive 20% of the profits they have generated, calculated quarterly on a reference level known as the high-water mark.
At Darwinex, the performance fees are calculated per Investor and DARWIN, according to the total net profit that an investor has obtained from a DARWIN since their first investment in it.
They are the incentive for the traders to share with investors their capacity to generate profits.
How is it calculated?
The calculation depends on two elements.
1. The high-water mark
The high-water mark, or HWM, is a widely used concept in the assets management industry as a reference for the fees that manager should receive. Using this method we ensure that they only receive fees for the profits they have actually generated, and that this does not overlap with profits from previous time periods.
Let's look at an example of a graph showing the progress of a DARWIN quote.
In the graph we can see how the HWM is calculated as the months pass. In month 3 the HWM1 is calculated for the profit generated in this time period. During the next month, no new HWM is generated. However, in the twelfth month, HWM1 is outperformed, therefore a new high-water mark is established: HWM2.
2. The time period
At Darwinex performance fee is charged per DARWIN and per investor on a quarterly basis, i.e. every three months. The quarter starts when the first investment by an investor is made in the DARWIN. Successive investments by the same investor in the same DARWINs have no effect on the starting date of the quarter.
Each time the quarter ends, if the previous high-water mark has been surpassed, 20% of the net profit (closed profit + open profit) generated in the quarter will be charged to the investor and paid to the trader.
Where can I see this?
In the "Investment" section, the subsection named ''Performace fees'' displays all historical performance fees you have paid for your investments, as well as retained performance fees for investments sold during the quarter.
If you sell an investment before quarter end, performance fees get retained and they get paid to the trader only on quarter end and only if they still apply. It could happen that you sell an investment with profit, have performance fees retained, and then, in the same quarter, invest again in the same DARWIN and end up closing your investment quarter with losses. In this case, retained performance fees would be paid back to the investor, instead of getting paid to the trader.