Commodity Pool Operator (CPO) Fee Structure

When looking to choose a Commodity Pool Operator (CPO) it is essential that one is aware and educated with regards to the types of fees that can be charged by a commodities fund.  It is important to know that nearly all Commodity Pools charge both a managerial fee and an incentive fee.

Managerial Fee- usually 2 percent per year on the net assets in a fund.

Example: if a fund has 1 billion dollars in assets then the annual managerial fee will be 20 million dollars.

Incentive or Performance Fee- this is usually 20 percent of the return.

Example: if a fund has invested 1 billion dollars and makes 100 million dollars (10%) return on that money, then the fund will receive 20 million dollars as their Incentive fee

There are other fees that are not as widely used, but are important to know.

Surrender Fee- this is assessed when an investor exits a fund prematurely, and is in place both as revenue for the manager and as a way to cover the costs of liquidating the assets

Example: Lock-up period on a fund is 2 years, but the investor wants to liquidate the million dollars they have invested, then a surrender fee will be charged on that million

Hurdle Rate- this is similar to a performance fee except that it is not collected unless the fund returns a minimum percentage on the investment.

Example: Hurdle rate equals 3%, fund returns 5%, then the manager can only collect their incentive fee of 20% on the 2% above the hurdle rate

High Water Mark- Investors are not refunded the performance fee if a loss occurs shortly after a gain, and having a High Water Mark protects the investor from paying a performance fee to a manager for making back their loss.

Example: A 1 billion dollar fund experiences a 10% return after its first year bringing the NAV (Net asset value) to 1.1 billion dollars, and a performance fee is paid on that 10% return to the manager.  The next year that fund loses 10% lowering the NAV to .99 billion dollars, no performance fee is paid.  The third year the fund brings a return of 15% effectively raising the NAV to 1.14 billion, then the investors only pay a performance fee on the .04 billion that is above the .1 billion they earned in the first year.

Lookback- this is not typically in a fee structure, but fund manager will rebate an incentive fee if a loss erases a gain shortly after an incentive fee is charged

Example: A futures fund makes a 1 million dollar return and is paid their 20 percent incentive fee.  1 month later the 1 million dollar return has been lost, then the manager will refund the 20 percent they made on the 1 million dollar return to the investors.

A Commodity Pool can charge a variety of fees as long as the properly disclose them to the investor.  Sometimes they can even charge a financing fee if they are making levered long or short financing transactions.