How can a registered adviser share a private fund's performance compensation with the fund's sponsor?
There are three common routes in public filings: the sponsor pays the adviser part of its fee under a sub-advisory agreement, the fund pays the adviser directly under an advisory agreement to which the fund is a party, or the adviser holds a non-voting interest in the fund that receives an allocation of profits.
Sub-advisory, paid by the sponsor. A 2024 prospectus for a private credit fund describes the sponsor-paid model: “The Manager will pay a portion of the Management Fee and Incentive Fee it receives from the Fund to the Subadviser. No advisory fees will be paid by the Fund directly to the Subadviser.”
Direct advisory, paid by the fund. In a 2022 management agreement among a commodity pool, its general partner and a trading advisor, the fund itself pays the advisor's incentive fee.
An allocation through a special interest. A 2009 sub-advisory agreement for a registered fund of private equity funds paid the sub-adviser an asset-based fee from the adviser, but delivered the sub-adviser's performance share as an allocation: the sub-adviser held non-voting interests in the fund in an incentive allocation account kept solely to receive it. Other filings call the holder a special advisory member or a special limited partner.
The choice changes whom the adviser relies on to be paid, how its share is taxed, what it must disclose and what the fund documents must say; the limited partnership agreement guide covers performance fees, hurdles and high-water marks from the fund's side. The routes can be combined. In the 2009 agreement, the asset-based fee followed the sub-advisory route while the performance share followed the allocation route. Many of the precedents in this guide are registered funds or business development companies, because those are the funds whose agreements are public; a private fund's documents are usually not filed, so the precedents show drafting patterns, not private-fund market frequency.
Sources for this answer
A 2024 fund prospectus states that the manager pays the subadviser a portion of its management and incentive fees and the fund pays the subadviser nothing directly.
The Manager will pay a portion of the Management Fee and Incentive Fee it receives from the Fund to the Subadviser. No advisory fees will be paid by the Fund directly to the Subadviser.
See PGIM Private Credit Fund, Prospectus, “Sub-Advisory Fee” (Apr. 29, 2024), filed on EDGAR.
In a three-party management agreement, the partnership itself pays the trading advisor its incentive fee and management fee.
In consideration of and as compensation for all of the services to be rendered by the Advisor to the Partnership under this Agreement, the Partnership shall pay the Advisor (i) an incentive fee payable annually equal to 20% of New Trading Profits (as such term is defined below) earned by the Advisor for the Partnership (the “Incentive Fee”) and (ii) a monthly fee for professional management services equal to 0.60% per year of the end of the month Net Asset Value of the Partnership allocated to the Advisor (computed monthly by multiplying the Net Asset Value of the Partnership allocated to the Advisor as of the last day of each month by 0.60% and dividing the result thereof by 12) (the “Management Fee”).
See Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC § 3(a) (Aug. 3, 2022), filed as Exhibit 10.1.
A filed sub-advisory agreement gives the sub-adviser its performance share as an incentive allocation credited to non-voting fund interests held solely for that purpose.
The Sub-Adviser holds non-voting interests of limited liability company interest in the Fund (“Interests”) in an incentive allocation account (“Incentive Allocation Account”) solely for the purpose of receiving the Incentive Allocation with respect to the Fund.
See Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC, Schedule A (form filed 2009 as Exhibit (g)(2)).
A filed fund LLC agreement admits the adviser as a non-voting special advisory member that shares in profit only through the incentive allocation.
The interest in the Fund of the Special Advisory Member shall be non-voting and shall have no participation in the net profit or net loss of the Fund other than as a result of the Incentive Allocation.
See BACAP Opportunity Strategy, LLC, Limited Liability Company Agreement § 2.8, in Form N-2/A, Pre-Effective Amendment No. 1 (June 18, 2002).
A filed registration statement states that the fund's key investment professionals share in the master fund's carried interest through ownership interests in its special limited partner.
In addition to investing in the Fund, all key investment professionals will participate, through ownership interests in the Special Limited Partner, in the carried interest of the Master Fund.
See NB Crossroads Private Markets Fund V (TE) LP, Form N-2, “Alignment of Interests” (2017), filed on EDGAR.
Should the adviser be paid by the sponsor under a sub-advisory agreement or by the fund under a direct advisory agreement?
Under a sub-advisory agreement the adviser's claim runs against the sponsor, so its pay depends on the sponsor's solvency and on the sponsor passing the money on; public sub-advisory agreements manage that risk with short pay-through deadlines, direct-payment rights and limits on the sponsor's power to waive fees. Under a direct agreement the fund pays the adviser, which removes the sponsor as a credit risk but makes the adviser a party to the fund's own contract.
Counterparty and credit risk. A sub-adviser paid by the sponsor is paid out of the sponsor's own receipts. A 2011 sub-advisory agreement for a registered multi-manager fund requires the investment adviser to pay the sub-adviser out of the fee the adviser receives from the fund, within five business days after the adviser receives its own fee. If the sponsor never collects, or collects and does not pay, the sub-adviser by default holds an unsecured contract claim against the sponsor, not a claim against the fund, unless it has negotiated a guarantee, security or an enforceable right to be paid directly by the fund. No source we found states that default as a rule; it follows from who the parties to each contract are.
Public agreements add three protections:
- Direct payment. A 2012 sub-advisory agreement for a business development company splits the adviser's base management and incentive fees evenly with the sub-adviser and lets the sub-adviser require the fund to pay its share directly, on the same day the fund pays the adviser. A 2010 real estate sub-advisory agreement goes further and assigns to the sub-advisor the right to receive its percentage of the incentive fee directly from the company.
- No unilateral waiver. The same 2012 agreement bars the adviser from waiving or deferring the sub-adviser's portion without the sub-adviser's written consent, and a 2015 business development company makes any deferral, reduction or waiver of the adviser's fees subject to the sub-adviser's prior written consent.
- A short pay-through deadline. The 2012 agreement requires payment within three business days after the adviser receives the fees.
Direct advisory. In the 2022 commodity-pool agreement, the general partner, the partnership and the trading advisor are all parties, and the partnership pays the advisor. The adviser then depends on the fund's assets rather than the sponsor's balance sheet, but it has a contract with the fund itself, which matters for disclosure and for custody. Under the SEC's custody rule, custody includes any arrangement under which an adviser is authorized to withdraw client funds or securities held by a custodian on the adviser's instruction. An adviser that will instruct the fund's custodian to pay its own fee, or that holds a general partner or comparable position, should therefore confirm how the custody rule applies to it.
Sources for this answer
A filed sub-advisory agreement pays the sub-adviser out of the fee the investment adviser receives from the fund, within five business days of that receipt.
As compensation for the services rendered by the Sub-Adviser hereunder, the Investment Adviser agrees to pay the Sub-Adviser out of the fee it receives from the Fund pursuant to the investment advisory agreement between the Fund and the Investment Adviser a monthly fee computed at the annual rate of 0.30% of the net assets of the Fund, determined as of the start of business on the first business day of each month, after adjustment for any subscriptions effective on such day (the "Sub-Advisory Fee"). The Sub-Advisory Fee shall be payable monthly in arrears within five business days after the Investment Adviser's receipt of payment of its investment advisory fee from the Fund.
See Advantage Advisers Xanthus Fund, L.L.C., Definitive Proxy Statement, form of Sub-Advisory Agreement § 8 (2011).
A filed BDC sub-advisory agreement gives the sub-adviser half of the adviser's base management and incentive fees within three business days of receipt, a right to direct payment from the fund, and a consent right over any waiver or deferral of its portion.
In consideration for the Sub-Adviser’s provision of the Sub-Advisory Services hereunder, the Adviser shall pay the Sub-Adviser fifty percent (50%) of the fees (including without limitation the Base Management Fee and Incentive Fee), payable to the Adviser pursuant to Section 3 of the Advisory Agreement, payable no later than three (3) business days after receipt of such amounts by the Adviser from the BDC. At the Sub-Adviser’s request, the Adviser shall arrange for the fees payable to the Sub-Adviser hereunder to be paid to the Sub-Adviser directly by the BDC on the same day the BDC pays (or is obligated to pay) the Adviser its fees (including without limitation the Base Management Fee and Incentive Fee) under the Advisory Agreement. Pursuant to Section 3 of the Advisory Agreement, the Adviser has retained the right to elect to waive or defer all or a portion of the fees that would otherwise be paid to it. The Adviser shall not make any such election with respect to the Sub-Adviser’s portion of such fees, without the prior written consent of the Sub-Adviser.
See Form of Investment Sub-Advisory Agreement among HMS Adviser, LP, Main Street Capital Partners, LLC, Main Street Capital Corporation and HMS Income Fund, Inc. § 3 (2012), filed as Exhibit (g)(2).
A filed sub-advisory agreement assigns to the sub-advisor the advisor's right to receive direct payment from the company of a share of the incentive fee.
Subordinated Incentive Fee. The Advisor hereby assigns its right to receive direct payment from the Company of 85% of all Subordinated Incentive Fees payable pursuant to the Advisory Agreement, in whatever form payable by the Company (i.e., cash, Shares or a promissory note).
See First Amended and Restated Sub-advisory Agreement between American Realty Capital II Advisors, LLC and Phillips Edison NTR LLC § 5.6 (2010), filed as Exhibit 10.4.
A filed BDC registration statement gives the sub-adviser half of the adviser's fees and makes any deferral, reduction or waiver of the adviser's fees subject to the sub-adviser's prior written consent.
On an annualized basis, Benefit Street will be paid 50% of the fees payable to GBA under the investment advisory agreement with respect to each year, which fees are payable to Benefit Street quarterly in arrears. Except as required by applicable law, rule or regulation, any deferral, reduction, waiver or other modification of the fees to be paid to GBA (including, without limitation, the manner and timing by which such fees are paid or payable to GBA) will require the prior written consent of Benefit Street.
See Griffin-Benefit Street Partners BDC Corp., Form N-2/A, Pre-Effective Amendment No. 5, “Sub-Advisory Fees” (Jan. 20, 2015).
The 2022 management agreement is made among the general partner, the partnership and the trading advisor.
THIS MANAGEMENT AGREEMENT (this “Agreement”) made as of August 3, 2022, by and among CERES MANAGED FUTURES LLC, a Delaware limited liability company (“CMF”), CERES TACTICAL COMMODITY L.P., a New York limited partnership (the “Partnership”) and EMC CAPITAL ADVISORS, LLC., an Illinois Limited Liability Company (“EMC” or the “Advisor”).
See Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC, preamble (Aug. 3, 2022), filed as Exhibit 10.1.
The 2022 management agreement sets a payment deadline for the incentive fee and management fee the partnership pays.
Incentive Fees and monthly Management Fees shall be paid within twenty (20) business days following the end of the period for which such fee is payable.
See Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC § 3(d) (Aug. 3, 2022), filed as Exhibit 10.1.
The custody rule defines custody to include an arrangement authorizing the adviser to withdraw client funds or securities from a custodian on its instruction, and a capacity such as general partner that gives legal ownership of or access to client assets.
(2) Custody means holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them. You have custody if a related person holds, directly or indirectly, client funds or securities, or has any authority to obtain possession of them, in connection with advisory services you provide to clients. Custody includes: (i) Possession of client funds or securities (but not of checks drawn by clients and made payable to third parties) unless you receive them inadvertently and you return them to the sender promptly but in any case within three business days of receiving them; (ii) Any arrangement (including a general power of attorney) under which you are authorized or permitted to withdraw client funds or securities maintained with a custodian upon your instruction to the custodian; and (iii) Any capacity (such as general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives you or your supervised person legal ownership of or access to client funds or securities.
See 17 C.F.R. § 275.206(4)-2(d)(2).
How does the adviser keep the sponsor's overhead out of the profits its share is measured on?
By defining the measurement base in the agreement: the adviser's share is computed on the fund's investment profit before the sponsor's own fees and overhead, with verification and audit rights so the adviser can check the number. A filed commodity-pool agreement determines the net assets behind the advisor's fees with no adjustment for management, administrative, selling-agent or incentive fees, while still charging ongoing fund expenses against the advisor's share.
When an adviser's share is a percentage of the sponsor's performance compensation, everything that reduces the fund's profit before that compensation is calculated reduces the adviser's share too. SEC examination staff have reported that some private fund advisers charged funds for costs the fund documents did not permit: “Advisers charged private fund clients for expenses that were not permitted by the relevant fund operating agreements, such as adviser-related expenses like salaries of adviser personnel, compliance, regulatory filings, and office expenses, thereby causing investors to overpay expenses.” Charges like those also shrink the base for a second adviser's share.
Filed agreements show three drafting tools:
- Measure before the sponsor's fees. The 2022 commodity-pool agreement computes net assets without deducting management, administrative, selling-agent or incentive fees.
- Exclude costs unrelated to the adviser. The same agreement does not exclude every fund expense: it attributes ongoing fund expenses, including offering and organizational expenses, to the assets the advisor manages, but leaves out litigation that does not involve the advisor's activities.
- Exclude items charged to only some investors. A 2009 sub-advisory agreement measures net profits without giving effect to any item not charged ratably to all members.
The negotiating objective is to separate three kinds of cost: the sponsor's own business overhead, which should stay out of the base; legitimate fund expenses, which normally reduce it; and costs attributable to a particular adviser or investor, which the agreement should allocate expressly.
Verification and audit rights. The base is only as good as the valuation behind it. SEC staff have observed that valuing fund holdings inconsistently with the disclosed process led to overcharging management fees and carried interest. Institutional-investor guidance summarized by a law firm calls for fund expenses to be reviewed and certified by the fund's independent auditor. For the adviser, the practical rights are delivery of the calculation with each payment or allocation, access to the fund's books and the audited financial statements, a true-up once the audit is final (see the mechanics question below), and a dispute process.
Measuring the base before the sponsor's overhead is different from taking a share of the fund's gross income. Proposed Treasury regulations from 2015 would presume that an allocation of gross income lacks significant entrepreneurial risk and is a disguised payment for services, which would be taxed as a fee rather than as a partnership allocation. The statute behind them treats an allocation and distribution as a payment to a non-partner when the services and the allocation, viewed together, are properly so characterized. We did not find those regulations finalized as of this guide's date. An allocation route should keep the adviser's share tied to the fund's net investment profit, with losses counted, and keep only the sponsor's own overhead out of the base.
Sources for this answer
SEC examination staff observed private fund advisers charging funds for adviser-related expenses that the fund documents did not permit.
Advisers charged private fund clients for expenses that were not permitted by the relevant fund operating agreements, such as adviser-related expenses like salaries of adviser personnel, compliance, regulatory filings, and office expenses, thereby causing investors to overpay expenses.
See SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds § II.B (June 23, 2020).
The 2022 management agreement determines the net assets on which the advisor's fees are measured without adjusting for management, administrative, selling-agent or incentive fees.
“Net Assets of the Partnership” shall have the meaning set forth in Section 7(d)(2) of the Partnership Agreement without regard to further amendments thereto, provided that in determining the Net Assets of the Partnership on any date, no adjustment shall be made to reflect any distributions, redemptions, management fees, administrative fees, ongoing selling agent fees, or incentive fees accrued or payable as of the date of such determination.
See Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC § 3(b) (Aug. 3, 2022), filed as Exhibit 10.1.
The 2022 management agreement attributes ongoing fund expenses, including offering and organizational expenses, to the assets the advisor manages, but excludes litigation not involving the advisor's activities.
Ongoing expenses shall be attributed to the assets managed by the Advisor (but shall be paid by the Partnership) based on the Advisor’s proportionate share of Net Assets of the Partnership. Ongoing expenses shall not include expenses of litigation not involving the activities of the Advisor on behalf of the Partnership. Ongoing expenses include offering and organizational expenses of the Partnership.
See Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC § 3(c) (Aug. 3, 2022), filed as Exhibit 10.1.
The 2022 management agreement excludes litigation expenses not involving the advisor from the ongoing expenses charged against the advisor's base.
Ongoing expenses shall not include expenses of litigation not involving the activities of the Advisor on behalf of the Partnership.
See Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC § 3(c) (Aug. 3, 2022), filed as Exhibit 10.1.
The 2009 sub-advisory agreement measures the incentive allocation on net profits including unrealized appreciation, without giving effect to items not charged ratably to all members, over a loss recovery account and subject to a hurdle.
Capvent US Advisors LLC (the “Sub-Adviser”) will receive an Incentive Allocation as of the last day of each allocation period (as defined below) with respect to the Fund, of 5% of the net profits of the Fund (taking into account any unrealized appreciation or depreciation of investments, but without giving effect to the Incentive Allocation and any item not charged ratably to all persons who are admitted as members of the Fund (each a “Member”), if any, over the then balance of the Fund’s Loss Recovery Account (as defined below), appropriately adjusted for any partial repurchases, partial distributions or partial transfers; provided that the net profits of the Fund equals or exceeds an annualized return of at least a 6% (adjusted for contributions, repurchases and distributions) for such allocation period.
See Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC, Schedule A (form filed 2009 as Exhibit (g)(2)).
SEC examination staff observed that valuations inconsistent with the disclosed process led to overcharged management fees and carried interest.
In some cases, the staff observed that this failure to value a private fund’s holdings in accordance with the disclosed valuation process led to overcharging management fees and carried interest because such fees were based on inappropriately overvalued holdings.
See SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds § II.B (June 23, 2020).
Law-firm commentary summarizes ILPA Principles 3.0 as calling for fees and expenses to be disclosed regularly and subject to LPAC review and independent auditor certification.
Fees and expenses should be regularly disclosed and subject to LPAC review and independent auditor certification.
See Torys LLP, Overview of ILPA Principles 3.0 and Model LPA (Mar. 2020).
The 2015 proposed regulations list an allocation of gross income among the facts that create a presumption that an arrangement lacks significant entrepreneurial risk and is a disguised payment for services.
(1) The arrangement lacks significant entrepreneurial risk. Whether an arrangement lacks significant entrepreneurial risk is based on the service provider’s entrepreneurial risk relative to the overall entrepreneurial risk of the partnership. Paragraphs (c)(1)(i) through (v) of this section provide facts and circumstances that create a presumption that an arrangement lacks significant entrepreneurial risk and will be treated as a disguised payment for services unless other facts and circumstances establish the presence of significant entrepreneurial risk by clear and convincing evidence: (i) Capped allocations of partnership income if the cap is reasonably expected to apply in most years; (ii) An allocation for one or more years under which the service provider’s share of income is reasonably certain; (iii) An allocation of gross income;
See Disguised Payments for Services, 80 Fed. Reg. 43652 (proposed July 23, 2015) (Prop. Treas. Reg. § 1.707-2(c)(1)), REG-115452-14.
Section 707(a)(2)(A) treats a related allocation and distribution to a partner who performs services as a transaction with a non-partner when the two, viewed together, are properly so characterized.
(A) Treatment of certain services and transfers of propertyIf— (i) a partner performs services for a partnership or transfers property to a partnership, (ii) there is a related direct or indirect allocation and distribution to such partner, and (iii) the performance of such services (or such transfer) and the allocation and distribution, when viewed together, are properly characterized as a transaction occurring between the partnership and a partner acting other than in his capacity as a member of the partnership, such allocation and distribution shall be treated as a transaction described in paragraph (1).
See 26 U.S.C. § 707(a)(2)(A).
Is a share of a performance allocation taxed differently from a share of a performance fee?
Often, yes. An allocation keeps the character of the fund's income as it passes through the partnership, so long-term capital gain can reach the adviser's owners at capital-gain rates; for gain subject to the carried-interest rule in section 1061, that generally means gain on assets the fund held more than three years. A fee is ordinary income. At top 2026 federal rates, that is roughly 23.8 percent against about 40 percent on gain that qualifies, and much less difference on gain that does not.
Character and section 1061. Accounting-firm commentary explains why an allocation can be worth more than the same amount paid as a fee: “The most salient being that the portion of current income attributable to unrealized gains remains unrealized for the manager because the character of the income (ordinary, long-term capital gain, portfolio deduction) is retained when passed through a partnership to its partners.” Section 1061 reaches a partnership interest held in connection with substantial services in an applicable trade or business, which includes raising or returning capital together with investing in or developing specified assets, and the IRS summarizes its effect: “The provision generally requires that a capital asset be held for more than three years for capital gain allocated with respect to any applicable partnership interest (API) to be treated as long-term capital gain.” A fund that trades actively may produce little gain that clears three years, so the rate benefit of an allocation can be small for a hedge fund. The regulations leave some long-term items out of the section 1061 computation altogether, including section 1231 gain, section 1256 gain on contracts marked to market (relevant to futures funds) and qualified dividends, so those items are not recharacterized by the three-year rule.
Rates. For 2026 the top individual rate is 37 percent, the top rate on most long-term capital gain is 20 percent, and the net investment income tax adds 3.8 percent above the statutory thresholds on investment income, which includes capital gains. Income taken into account for self-employment tax is excluded from net investment income, so a fee that is self-employment income bears the Medicare self-employment tax rather than the net investment income tax.
Self-employment tax. Gain from the sale or exchange of a capital asset is excluded from net earnings from self-employment, so a capital-gain allocation is generally not self-employment income. Commentary treats management fees that flow to an individual as self-employment income, and above the Social Security wage base the remaining Medicare portion is 2.9 percent plus a 0.9 percent additional tax above a threshold. An S corporation adviser is different; see the pass-through question below. The exclusion for a limited partner's distributive share is unsettled: in August 2026 the Fifth Circuit withdrew its January 2026 opinion in Sirius Solutions and, in a substituted opinion now captioned K Alain, L.L.L.P. v. Commissioner, held that a limited partner is a partner who plays no significant role in managing or running a business, vacating the Tax Court's judgment and remanding. That case concerns the limited partner exclusion only; the capital-gain exclusion in section 1402(a)(3) applies independently of it, so the case does not by itself make a genuine capital-gain allocation self-employment income. Investment management is also a specified service business, and a specified service business is not a qualified trade or business for the section 199A deduction; below a taxable-income threshold plus a phase-in range the exclusion does not apply, and within the range only part of the income counts, measured at the owner's level. The illustration below assumes an owner above the range.
An illustration. Take a hypothetical fund with $40 million of capital that earns a 10 percent return in a year, or $4,000,000, and pays 20 percent of that, $800,000, as performance compensation. Suppose the adviser's share is 40 percent of it, or $320,000. These figures are invented for the example.
| Assumption or result | Allocation of long-term gain on assets held more than three years | Cash performance fee |
|---|---|---|
| Character to the adviser's individual owner | Long-term capital gain | Ordinary income |
| Federal income tax rate (top bracket, 2026) | 20% | 37% |
| Medicare-type tax | 3.8% net investment income tax | about 3.8% self-employment Medicare tax (2.9% + 0.9%) |
| Combined federal rate assumed (simple sum of statutory rates) | 23.8% | 40.8% |
| Federal tax on $320,000 | $76,160 | $130,560 |
| After federal tax | $243,840 | $189,440 |
The difference in this simplified example is $54,400. The 40.8 percent figure adds statutory rates; it is not an effective rate. Computed more closely, self-employment tax applies to 92.35 percent of net earnings, and half of the 2.9 percent Medicare tax is deductible for income tax purposes. On $320,000 that gives a self-employment base of $295,520, Medicare taxes of $11,229.76 at 3.8 percent, a deduction of $4,285.04, and federal tax of about $128,044, or about 40.0 percent, leaving about $191,956 after tax and a difference of about $51,884.
The comparison assumes an individual owner of an adviser taxed as a partnership, or a sole proprietor, whose fee share is self-employment income; an S corporation owner is taxed differently (see the pass-through question below). It also assumes the owner is in the top bracket with income above the net investment income tax and additional Medicare thresholds and above the Social Security wage base, ignores state and local tax, assumes the section 199A deduction is unavailable, and assumes all the fund's gain is long-term gain on assets held more than three years that section 1061 would otherwise reach. If the gain were short-term, or long-term but on assets held three years or less, the allocation would be taxed at ordinary rates plus the net investment income tax, close to the fee's rate, and most of the rate advantage would disappear; the timing, self-employment and investor-side differences discussed in the next question could remain.
Sources for this answer
Accounting-firm commentary says a profit reallocation through a pass-through entity retains the character of the fund's income and keeps unrealized gains unrealized for the manager.
The most salient being that the portion of current income attributable to unrealized gains remains unrealized for the manager because the character of the income (ordinary, long-term capital gain, portfolio deduction) is retained when passed through a partnership to its partners.
See Mazars USA LLP, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds, Legal 500 Intelligence (May 31, 2019).
Section 1061 defines an applicable partnership interest as a partnership interest transferred to or held by the taxpayer in connection with substantial services in an applicable trade or business.
Except as provided in this paragraph or paragraph (4), the term “applicable partnership interest” means any interest in a partnership which, directly or indirectly, is transferred to (or is held by) the taxpayer in connection with the performance of substantial services by the taxpayer, or any other related person, in any applicable trade or business.
See 26 U.S.C. § 1061(c)(1).
Section 1061(c)(2) defines an applicable trade or business as a regular, continuous and substantial activity consisting of raising or returning capital and investing in or developing specified assets.
(2) Applicable trade or businessThe term “applicable trade or business” means any activity conducted on a regular, continuous, and substantial basis which, regardless of whether the activity is conducted in one or more entities, consists, in whole or in part, of— (A) raising or returning capital, and (B) either— (i) investing in (or disposing of) specified assets (or identifying specified assets for such investing or disposition), or (ii) developing specified assets.
See 26 U.S.C. § 1061(c)(2).
The IRS states that section 1061 generally requires a capital asset to be held more than three years for gain allocated to an applicable partnership interest to be long-term.
The provision generally requires that a capital asset be held for more than three years for capital gain allocated with respect to any applicable partnership interest (API) to be treated as long-term capital gain.
See IRS, Section 1061 Reporting Guidance FAQs, Purpose of reporting guidance (page last reviewed Aug. 21, 2026).
The section 1061 regulations exclude section 1231 gain and loss, section 1256 gain and loss and qualified dividends from the amounts recharacterized under the three-year rule.
(7) Items not taken into account for purposes of section 1061. The following items of long-term capital gain and loss are excluded from the calculation of the API One Year Distributive Share Amount in paragraph (a)(3)(i) of this section and the API Three Year Distributive Share Amount in paragraph (a)(3)(ii) of this section— (i) Long-term capital gain and long-term capital loss determined under section 1231; (ii) Long-term capital gain and long-term capital loss determined under section 1256; (iii) Qualified dividends included in net capital gain for purposes of section 1(h)(11)(B); and
See Treas. Reg. § 1.1061-4(b)(7).
Accounting-firm commentary says the three-year rule diminishes the benefit of carry for hedge fund partners whose income rarely comes from long holding periods.
Now that carry interests can only receive the beneficial tax rate on long term capital gains if the holding period exceeds three years, the benefit of being a partner in a hedge fund has slightly diminished as less of their income is likely to be generated by such a longer holding period unless that's the strategy the fund employs.
See Mazars USA LLP, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds, Legal 500 Intelligence.
The IRS states that the top individual income tax rate for 2026 remains 37 percent.
Marginal Rates: For tax year 2026, the top tax rate remains 37% for individual single taxpayers with incomes greater than $640,600 ($768,700 for married couples filing jointly).
See IRS, IRS releases tax inflation adjustments for tax year 2026, including amendments from the One, Big, Beautiful Bill (IRS newsroom).
The IRS states that a 20 percent capital gains rate applies above the 15 percent rate thresholds.
However, a capital gains rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.
See IRS, Topic No. 409, Capital Gains and Losses.
The IRS states that the net investment income tax applies at 3.8 percent and that investment income includes capital gains.
The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.
See IRS, Questions and Answers on the Net Investment Income Tax.
Accounting-firm commentary says management fees flowing to an individual are self-employment income, and that fees paid to a New York City non-corporate entity are subject to the city's unincorporated business tax.
Management fees, generally sourced as sales to a specific state (which will be discussed further below), are self-employment income subject to that tax if flowing to an individual, and, when paid to a New York City-based non-corporate entity, subject to the 4% Unincorporated Business Tax (UBT).
See Mazars USA LLP, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds, Legal 500 Intelligence (May 31, 2019).
The IRS states that investment income for the net investment income tax includes capital gains and income from businesses trading financial instruments.
In general, investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and businesses that are passive activities to the taxpayer (within the meaning of section 469).
See IRS, Questions and Answers on the Net Investment Income Tax, Q&A 8.
Section 1411(c)(6) excludes from net investment income any item taken into account in determining self-employment income on which the section 1401(b) tax is imposed.
(6) Special rule Net investment income shall not include any item taken into account in determining self-employment income for such taxable year on which a tax is imposed by section 1401(b).
See 26 U.S.C. § 1411(c)(6).
Section 1402(a)(3) excludes gain or loss from the sale or exchange of a capital asset from net earnings from self-employment.
(3) there shall be excluded any gain or loss— (A) which is considered as gain or loss from the sale or exchange of a capital asset, (B) from the cutting of timber, or the disposal of timber, coal, or iron ore, if section 631 applies to such gain or loss, or (C) from the sale, exchange, involuntary conversion, or other disposition of property if such property is neither— (i) stock in trade or other property of a kind which would properly be includible in inventory if on hand at the close of the taxable year, nor (ii) property held primarily for sale to customers in the ordinary course of the trade or business;
See 26 U.S.C. § 1402(a)(3).
Section 1401(b) imposes a 2.9 percent tax on self-employment income and a 0.9 percent additional tax above a threshold.
In addition to the tax imposed by the preceding subsection, there shall be imposed for each taxable year, on the self-employment income of every individual, a tax equal to 2.9 percent of the amount of the self-employment income for such taxable year.
See 26 U.S.C. § 1401(b)(1); see id. § 1401(b)(2) (additional 0.9 percent tax).
Section 1401(b)(2) imposes an additional 0.9 percent tax on self-employment income above $200,000, or $250,000 on a joint return.
(A) In generalIn addition to the tax imposed by paragraph (1) and the preceding subsection, there is hereby imposed on every taxpayer (other than a corporation, estate, or trust) for each taxable year beginning after December 31, 2012, a tax equal to 0.9 percent of the self-employment income for such taxable year which is in excess of— (i) in the case of a joint return, $250,000, (ii) in the case of a married taxpayer (as defined in section 7703) filing a separate return, ½ of the dollar amount determined under clause (i), and (iii) in any other case, $200,000.
See 26 U.S.C. § 1401(b)(2)(A).
Section 164(f) allows an individual an income tax deduction for one-half of the section 1401 self-employment taxes, other than the additional 0.9 percent tax.
(1) In general In the case of an individual, in addition to the taxes described in subsection (a), there shall be allowed as a deduction for the taxable year an amount equal to one-half of the taxes imposed by section 1401 (other than the taxes imposed by section 1401(b)(2)) for such taxable year.
See 26 U.S.C. § 164(f)(1).
Section 1402(a)(12) allows a deduction in computing net earnings from self-employment, and section 1402(a)(13) excludes a limited partner's distributive share other than guaranteed payments for services.
(12) in lieu of the deduction provided by section 164(f) (relating to deduction for one-half of self-employment taxes), there shall be allowed a deduction equal to the product of— (A) the taxpayer’s net earnings from self-employment for the taxable year (determined without regard to this paragraph), and (B) one-half of the sum of the rates imposed by subsections (a) and (b) of section 1401 for such year (determined without regard to the rate imposed under paragraph (2) of section 1401(b)); (13) there shall be excluded the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described in section 707(c) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services;
See 26 U.S.C. § 1402(a)(12)–(13).
Accounting-firm commentary reports that on August 12, 2026 the Fifth Circuit withdrew its January 2026 Sirius Solutions opinion and substituted a management-and-control test for the limited partner exclusion.
On Aug. 12, 2026, the Fifth Circuit granted rehearing, withdrew the January opinion in its entirety, and issued a substitute opinion. While the new opinion continues to reject the Tax Court's functional analysis test, it abandons the limited-liability standard that drove the original decision—meaning that limited liability itself does not determine whether a limited partner qualifies for the exception.
See RSM US LLP, Fifth Circuit withdraws and replaces January 2026 Sirius Solutions opinion (tax alert, 2026).
The Fifth Circuit's substituted opinion holds that a limited partner, for the self-employment tax exclusion, is a partner who plays no significant role in managing or running a business.
This case concerns the meaning of the term “limited partner” in 26 U.S.C. § 1402(1)(13). Today, we hold its original public meaning is a partner who plays no significant role in managing or running a business.
See K Alain, L.L.L.P. v. Commissioner, No. 24-60240, slip op. at 1 (5th Cir. Aug. 12, 2026) (per curiam), withdrawing and substituting for Sirius Solutions, L.L.L.P. v. Commissioner, 165 F.4th 374 (5th Cir. 2026).
Section 199A(d)(1) excludes a specified service trade or business from the qualified trades or businesses eligible for the deduction.
(1) In generalThe term “qualified trade or business” means any trade or business other than— (A) a specified service trade or business, or (B) the trade or business of performing services as an employee.
See 26 U.S.C. § 199A(d)(1).
Section 199A(d)(3) lets a taxpayer below the threshold amount plus a phase-in range count an applicable percentage of a specified service business's income.
(A) In generalIf, for any taxable year, the taxable income of any taxpayer is less than the sum of the threshold amount plus $75,000 ($150,000 in the case of a joint return), then— (i) any specified service trade or business of the taxpayer shall not fail to be treated as a qualified trade or business due to paragraph (1)(A), but (ii) only the applicable percentage of qualified items of income, gain, deduction, or loss, and the W–2 wages and the unadjusted basis immediately after acquisition of qualified property, of the taxpayer allocable to such specified service trade or business shall be taken into account in computing the qualified business income, W–2 wages, and the unadjusted basis immediately after acquisition of qualified property of the taxpayer for the taxable year for purposes of applying this section.
See 26 U.S.C. § 199A(d)(3)(A).
Section 199A treats a business that performs investing and investment management services as a specified service trade or business.
(2) Specified service trade or businessThe term “specified service trade or business” means any trade or business— (A) which is described in section 1202(e)(3)(A) (applied without regard to the words “engineering, architecture,”) or which would be so described if the term “employees or owners” were substituted for “employees” therein, or (B) which involves the performance of services that consist of investing and investment management, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)).
See 26 U.S.C. § 199A(d)(2).
How does a fee or an allocation affect deferral of unrealized gains and the fund's investors?
An allocation can defer the adviser's tax on its share of unrealized gains until the fund realizes them, while a cash fee is taxed when the adviser receives or accrues it. For individual investors, an allocation reduces the income the fund allocates to them, while a fee paid by an investing (not trading) fund is a miscellaneous itemized deduction, which section 67(h), made permanent by Public Law 119-21, disallows for every taxable year beginning after 2017.
Deferral. A performance share measured on unrealized as well as realized gains is common; the 2009 sub-advisory agreement takes unrealized appreciation into account. Paid as a fee, that share is cash income to the adviser even though the fund has not sold anything. Allocated, the adviser's share of unrealized gain stays unrealized for tax purposes until the fund sells. Some fee structures avoid paying on unrealized gain at all: a 2024 private credit fund accrues, but does not pay, its capital-gains incentive fee on unrealized appreciation.
Investors' deduction. Section 67(h) now reads: “Notwithstanding subsection (a), no miscellaneous itemized deduction shall be allowed for any taxable year beginning after December 31, 2017.” That text is the former subsection (g), which the 2017 tax act limited to 2018 through 2025; section 70110 of Public Law 119-21 struck the 2026 end date and redesignated it as subsection (h), effective for taxable years beginning after December 31, 2025. Commentary explains that a fund classified as an investor rather than a trader passes its fees through to individual investors as miscellaneous itemized deductions, and that an allocation instead reduces the gains allocated to them.
Who bears that difference depends on how the fund pays the sponsor, not only on how the sponsor pays the adviser. If the fund pays the sponsor through an allocation and the sponsor pays the adviser a cash sub-advisory fee, the investors' tax position is the same as if the sponsor kept everything, and the difference falls on the sponsor and the adviser. If the fund pays the adviser a cash fee directly, an investing fund's individual investors bear a fee they cannot deduct. We found no public source that addresses directly how a sponsor that receives a capital-gain allocation and pays an ordinary sub-advisory fee should treat the payment. As a general matter, the character of the sponsor's allocated gain is fixed at the partnership level, as if realized directly by the partnership, whatever the sponsor later does with the cash; whether the sub-advisory fee it pays is deductible, and against what, depends on whether it is a business expense of the sponsor or an investment expense limited by section 67. That is a question for the sponsor's tax adviser, and no character-matched offset should be assumed.
The tax benefits of an allocation assume a valid partnership interest and a valid allocation. The IRS does not treat receipt of a profits interest for services as a taxable event if the conditions of its revenue procedures are met, but a capital interest, including a share of value the fund had already accrued when the adviser joined, can be taxable on grant. Allocations that lack substantial economic effect are reallocated by the partners' interests in the partnership. Have the fund's tax counsel confirm how the interest is granted, how existing accrued value is treated, and how book appreciation credited to the adviser's capital account maps to taxable gain.
Sources for this answer
Accounting-firm commentary says a profit reallocation through a partnership keeps the manager's share of unrealized gains unrealized.
The most salient being that the portion of current income attributable to unrealized gains remains unrealized for the manager because the character of the income (ordinary, long-term capital gain, portfolio deduction) is retained when passed through a partnership to its partners.
See Mazars USA LLP, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds, Legal 500 Intelligence.
The 2009 sub-advisory agreement measures the incentive allocation on net profits that take unrealized appreciation and depreciation into account.
Capvent US Advisors LLC (the “Sub-Adviser”) will receive an Incentive Allocation as of the last day of each allocation period (as defined below) with respect to the Fund, of 5% of the net profits of the Fund (taking into account any unrealized appreciation or depreciation of investments, but without giving effect to the Incentive Allocation and any item not charged ratably to all persons who are admitted as members of the Fund (each a “Member”), if any, over the then balance of the Fund’s Loss Recovery Account (as defined below), appropriately adjusted for any partial repurchases, partial distributions or partial transfers; provided that the net profits of the Fund equals or exceeds an annualized return of at least a 6% (adjusted for contributions, repurchases and distributions) for such allocation period.
See Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC, Schedule A (form filed 2009 as Exhibit (g)(2)).
A 2024 fund prospectus accrues, but does not pay, a capital gains incentive fee on unrealized appreciation.
We will accrue, but will not pay, a capital gains incentive fee with respect to unrealized appreciation because a capital gains incentive fee would be owed to the Manager if we were to sell the relevant investment and realize a capital gain.
See PGIM Private Credit Fund, Prospectus (Apr. 29, 2024), filed on EDGAR.
Section 67(h) disallows miscellaneous itemized deductions for any taxable year beginning after December 31, 2017.
Notwithstanding subsection (a), no miscellaneous itemized deduction shall be allowed for any taxable year beginning after December 31, 2017.
See 26 U.S.C. § 67(h) (as amended by Pub. L. 119-21, § 70110).
Section 70110(a) of Public Law 119-21 struck the 2026 end date from section 67(g) and retitled it to apply to taxable years beginning after 2017.
SEC. 70110. TERMINATION OF MISCELLANEOUS ITEMIZED DEDUCTIONS OTHER THAN EDUCATOR EXPENSES. (a) In General.--Section 67(g) is amended-- (1) by striking ``, and before January 1, 2026'', and (2) by striking ``2018 Through 2025'' in the heading and inserting ``Beginning After 2017''.
See Pub. L. No. 119-21, § 70110(a), 139 Stat. 164 (2025).
Section 70110(c) of Public Law 119-21 makes its amendments to section 67 apply to taxable years beginning after December 31, 2025.
Effective Date.--The amendments made by this section shall apply to taxable years beginning after December 31, 2025.
See Pub. L. No. 119-21, § 70110(c), 139 Stat. 164 (2025).
The statutory notes to section 67 record that Public Law 119-21 redesignated subsection (g) as subsection (h) and that the amendments apply to taxable years beginning after December 31, 2025.
Subsec. (h). Pub. L. 119–21, § 70110(b)(2), redesignated subsec. (g) as (h).
See 26 U.S.C. § 67 note (2025 Amendments); see Pub. L. No. 119-21, § 70110(c) (effective for taxable years beginning after Dec. 31, 2025).
Section 702(b) determines the character of each item in a partner's distributive share as if the item were realized directly from the source from which the partnership realized it.
(b) Character of items constituting distributive share The character of any item of income, gain, loss, deduction, or credit included in a partner’s distributive share under paragraphs (1) through (7) of subsection (a) shall be determined as if such item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership.
See 26 U.S.C. § 702(b).
Rev. Proc. 2001-43 restates that under Rev. Proc. 93-27 the IRS does not treat receipt of a profits interest for services to a partnership as a taxable event, subject to the procedure's exceptions.
Rev. Proc. 93-27 provides that (except as otherwise provided in section 4.02 of the revenue procedure), if a person receives a profits interest for the provision of services to or for the benefit of a partnership in a partner capacity or in anticipation of being a partner, the Internal Revenue Service will not treat the receipt of the interest as a taxable event for the partner or the partnership.
See Rev. Proc. 2001-43, § 2, 2001-2 C.B. 191.
Section 704(b) determines a partner's distributive share by the partner's interest in the partnership when the agreement's allocation lacks substantial economic effect.
(b) Determination of distributive shareA partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof) shall be determined in accordance with the partner’s interest in the partnership (determined by taking into account all facts and circumstances), if— (1) the partnership agreement does not provide as to the partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof), or (2) the allocation to a partner under the agreement of income, gain, loss, deduction, or credit (or item thereof) does not have substantial economic effect.
See 26 U.S.C. § 704(b).
Accounting-firm commentary says an investor fund's management fees flow to individuals as miscellaneous itemized deductions, which are no longer deductible.
If the fund holds onto investments and tries to benefit from long-term appreciation, it will be classified as an "investor" and the professional expenses and management fees will instead be classified as miscellaneous itemized deductions if flowing to an individual. Miscellaneous itemized deductions are no longer deductible at all under TCJA.
See Mazars USA LLP, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds, Legal 500 Intelligence.
Financial-planning commentary explains that a carried interest allocated at the partnership level reduces the gains allocated to and taxed to the limited partners.
The reason the carried interest payment has the potential to benefit limited partners from a tax perspective is because the carry is allocated to the general partner at the partnership level, and therefore reduces the amount of taxable gains that are attributable (and taxable) to the limited partners.
See Kitces.com, Maximizing Pre-Tax Investment Advisory Fees After TCJA (Mar. 6, 2019).
Does it matter whether the adviser receiving the allocation is a pass-through entity or a C corporation?
Yes. Section 1061 does not apply to a partnership interest held by a corporation, but a C corporation pays the same 21 percent rate whatever the character of its income, so a C corporation adviser gains little on rate from an allocation. An S corporation is not a corporation for this purpose and is subject to the three-year rule.
The section 1061 regulations say: “An API does not include any interest directly or indirectly held by a corporation.” They then exclude S corporations and certain electing foreign funds from the meaning of corporation. A C corporation's tax is 21 percent of taxable income, and commentary notes that corporate partners are indifferent to the holding period of the fund's investments. The same commentary cautions that a C corporation adds a second layer of tax when profits are distributed to its owners.
For a C corporation adviser, then, the case for an allocation rests mainly on timing, investor-side effects and credit position rather than rate. For an adviser taxed as a partnership (including an LLC taxed as one) and owned by individuals, the rate and self-employment analysis in the previous questions passes through to the owners. An S corporation adviser differs on self-employment tax: the IRS treats non-wage distributions to shareholders as not subject to employment taxes, but an S corporation must pay a shareholder-employee reasonable compensation, as wages, before making non-wage distributions. It remains subject to section 1061.
Sources for this answer
The section 1061 regulations exclude interests held by a corporation from the definition of API, and treat S corporations and QEF-electing PFICs as not corporations for that purpose.
An API does not include any interest directly or indirectly held by a corporation.
See Treas. Reg. § 1.1061-3(b)(1); see id. § 1.1061-3(b)(2).
The section 1061 regulations do not treat an S corporation, or a PFIC subject to a QEF election, as a corporation for the corporate exclusion.
(2) Treatment of interests held by an S corporation or a qualified electing fund. For purposes of this section, a corporation does not include an entity for which an election was made to treat the entity as a Passthrough Entity. Thus, the following entities are not treated as corporations for purposes of section 1061— (i) An S corporation for which an election under section 1362(a) is in effect; and (ii) A passive foreign investment company (PFIC) with respect to which the shareholder has a qualified electing fund (QEF) election under section 1295 in effect.
See Treas. Reg. § 1.1061-3(b)(2).
The IRS describes non-wage distributions from an S corporation as not subject to employment taxes, and wages as subject to them.
The IRS has the authority to reclassify payments made to shareholders from non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes).
See IRS, S Corporation Compensation and Medical Insurance Issues.
The IRS states that an S corporation must pay reasonable compensation to a shareholder-employee before making non-wage distributions.
S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee.
See IRS, S Corporation Compensation and Medical Insurance Issues.
Section 11(b) sets the corporate income tax at 21 percent of taxable income.
The amount of the tax imposed by subsection (a) shall be 21 percent of taxable income.
See 26 U.S.C. § 11(b).
Accounting-firm commentary says corporate partners are indifferent to the fund's trader or investor classification and to the holding period of its investments.
Corporate partners are not subject to similar deduction limitations and are indifferent to the fund's classification as a "trader" or "investor," as they are indifferent to the holding period of the investments – setting up a potential conflict between different types of investors.
See Mazars USA LLP, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds, Legal 500 Intelligence.
Accounting-firm commentary notes that a C corporation management company keeps a second layer of tax on dividends or on the sale of its shares.
C corporations will still have the double layer of taxation, first at the corporate rate on profits and then at the shareholder level on dividends (or capital gains upon disposition by the shareholder).
See Mazars USA LLP, How the President's Tax Reform Has Changed the Compensation Structures of Hedge and Private Equity Funds, Legal 500 Intelligence.
What terms make a special limited partner allocation safe for the adviser?
Unless the agreement turns a crystallized allocation into a fixed distribution obligation, an allocation stays in the adviser's capital account in the fund until it is withdrawn, so the protective terms are a right to withdraw promptly when the allocation crystallizes, true-up after the audit, tax distributions, a clawback that is limited and clearly defined, rules for what happens to the interest after the adviser's role ends, and an understanding of where the adviser ranks if the fund fails. One filed agreement lets the sub-adviser withdraw up to 95 percent on unaudited figures, with a true-up after the audit.
Withdrawal on crystallization, and the true-up. The 2009 sub-advisory agreement says: “After the close of an allocation period with respect to a Member, and subject to certain limitations, the Sub-Adviser may withdraw up to 95% of the Incentive Allocation, computed on the basis of unaudited data, that was credited to its Incentive Allocation Account with respect to such allocation period.” After the audit, the fund credits any shortfall and the sub-adviser repays any excess. A 2011 agreement allows up to 100 percent on unaudited data by the last business day of the following month, with any additional amount paid within 30 days after the audit and any excess repaid. A 2002 agreement lets the adviser withdraw its allocation at any time after it is made. A fee-route precedent uses the same idea: 90 percent of the incentive fee within 30 days after year-end and the balance within 30 days after the audit.
Tax distributions. An allocation can create taxable income before cash is distributed. A 2017 fund of private equity funds lets its board, in its sole discretion, make distributions to the special limited partner designed to help it satisfy income tax on allocated income and gains. An adviser should ask for a mandatory tax distribution rather than a discretionary one, computed at an assumed combined rate.
Clawback. Institutional-investor guidance favors clawbacks gross of taxes paid, and escrow of accrued carried interest. From the adviser's side, the points to settle are whether the clawback is net of taxes, whether liability is several and capped at what the adviser itself received, and how long it lasts.
After the adviser's role ends. The 2009 agreement closes an allocation period on the day the sub-adviser's status ends, but provides that no allocation is payable if the sub-adviser ends it voluntarily or the board ends it for gross negligence or willful misconduct. A fee-route agreement pays a terminated sub-adviser an incentive fee computed through the termination date, 90 percent within 30 days and the balance after the audit. A 2002 agreement provides for the admission of a substitute special advisory member when the advisory agreement ends. An adviser should ensure that a terminated adviser's interest stays outstanding, with its capital account, until a final settlement or a stated long-stop date, rather than being forfeited or cancelled at termination. We found no public precedent that uses the term long-stop for this; it is a drafting suggestion, not a market report.
Creditor ranking and drawdown risk. Unless the partnership agreement fixes a crystallized allocation as a distribution owed, an allocated amount stays in the adviser's capital account and rises and falls with the portfolio until it is withdrawn; the adviser should confirm which the agreement does. Subject to the partnership agreement and to sections 17-607 and 17-804, once a partner becomes entitled to a distribution, Delaware law gives it a creditor's status for that distribution. In a winding up, creditors, including partners who are creditors, are paid first (other than for distributions owed under sections 17-601 and 17-604); then, unless the agreement provides otherwise, partners and former partners for those distributions; then partners for the return of contributions and in respect of their partnership interests. A partnership may not make a distribution to the extent that, afterward, its liabilities (other than liabilities to partners on account of their interests and non-recourse liabilities) would exceed the fair value of its assets, and reasonable compensation for services is not a distribution for this purpose. A limited partner who knew when it received a distribution that it violated that limit is liable for the amount, and unless otherwise agreed that liability ends three years after the distribution. Whether a particular performance allocation payment is a distribution or reasonable compensation for services under that test is not settled by the statute. A cash fee owed by the fund is, by default, the claim of an ordinary creditor unless it is secured; a fee owed by the sponsor is a claim only against the sponsor unless a guarantee or direct-payment right reaches the fund. Which position is better depends on whose insolvency is more likely, which is a credit judgment rather than a rule.
Sources for this answer
The 2009 sub-advisory agreement allows withdrawal of up to 95 percent of the incentive allocation on unaudited data, with a true-up in either direction after the audit.
After the close of an allocation period with respect to a Member, and subject to certain limitations, the Sub-Adviser may withdraw up to 95% of the Incentive Allocation, computed on the basis of unaudited data, that was credited to its Incentive Allocation Account with respect to such allocation period. The Fund will pay any balance, subject to audit adjustments, as promptly as practicable after the completion of the audit of the Fund’s books. As promptly as practicable after the completion of the audit of the books of the Fund for the year in which allocations to the Incentive Allocation Account are made, the Fund shall allocate to the Incentive Allocation Account any additional amount of Incentive Allocation determined to be owed to the Sub-Adviser based on such audit, and the Sub-Adviser shall remit to the Fund any excess amount of Incentive Allocation determined to be owed to the Fund.
See Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC, Schedule A (form filed 2009 as Exhibit (g)(2)).
A filed LLC agreement lets the special advisory member withdraw up to 100 percent of the incentive allocation on unaudited data by the end of the following month.
(b) By the last business day of the month following the date on which an Incentive Allocation is made, the Special Advisory Member may withdraw up to 100% of the Incentive Allocation (computed on the basis of unaudited data) that was credited to the Special Advisory Account. Within 30 days after the completion of the audit of the books of the Company for the year in which allocations to the Special Advisory Account are made, the Company shall pay to the Special Advisory Member any additional amount of Incentive Allocation determined to be owed to the Special Advisory Member based on the audit, and the Special Advisory Member shall Appendix – 1 pay to the Company any excess amount of Incentive Allocation determined to be owed to the Company.
See Advantage Advisers Xanthus Fund, L.L.C., Definitive Proxy Statement, Appendix (L.L.C. Agreement § 5.8(b)) (2011).
A filed fund LLC agreement lets the adviser withdraw its incentive allocation at any time after it is made.
The Adviser may withdraw any Incentive Allocation credited to the Special Advisory Account at any time following the date on which the Incentive Allocation is made.
See BACAP Opportunity Strategy, LLC, Limited Liability Company Agreement § 4.6(d), in Form N-2/A, Pre-Effective Amendment No. 1 (June 18, 2002).
A 2001 registration statement pays 90 percent of the annual incentive fee within 30 days after fiscal year-end and the balance after the audit, and states the manager's intention to assign the fee to the sub-adviser.
The Incentive Fee for the preceding fiscal year, if any, shall be paid by the Fund as follows: (i) 90% to be paid within 30 days after the Fund’s fiscal year-end; and (ii) the balance to be paid within 30 days after the completion of the Fund’s audit for the fiscal year. The Manager intends to assign the Incentive Fee to the Sub-Adviser so long as the Sub-Adviser acts in that role for the Fund.
See Bessemer Funds Trust, Form N-2 (Apr. 19, 2001), filed on EDGAR.
A filed registration statement lets the master fund's board make tax distributions to the special limited partner.
The Board of the Master Fund may in its sole discretion cause the Master Fund to distribute to the Special Limited Partner (each, a “Tax Distribution”) an amount designed to assist the Special Limited Partner (or its direct and indirect investors) in satisfying any income tax liability attributable to allocations of taxable income and gains of the Master Fund in any fiscal year for which such an accrual or such an allocation is required.
See NB Crossroads Private Markets Fund V (TE) LP, Form N-2, “Tax Distributions” (2017), filed on EDGAR.
Law-firm commentary summarizes ILPA Principles 3.0 as calling for clawbacks gross of taxes paid and repaid within two years.
Clawback should be gross of taxes paid, and repaid no later than two years following liability recognition.
See Torys LLP, Overview of ILPA Principles 3.0 and Model LPA (Mar. 2020).
Law-firm commentary summarizes ILPA Principles 3.0 as calling for accrued carried interest to be escrowed with significant reserves.
Accrued carried interest should be held in escrow accounts with significant reserves (e.g., 30% of carry or more) and require additional reserves to cover potential clawback liabilities.
See Torys LLP, Overview of ILPA Principles 3.0 and Model LPA (Mar. 2020).
The 2009 sub-advisory agreement ends an allocation period when the sub-adviser's status ends, but pays no allocation if the sub-adviser ends it voluntarily or the board ends it for gross negligence or willful misconduct.
An “allocation period” is a period commencing on commencement of operations of the Fund and, thereafter, each period commencing as of the day following the last day of the preceding allocation period and ending on the first to occur of (1) the last day of each calendar year, (2) the valuation date with respect to any repurchase of Interests or a portion of the Interests, or the day preceding the effective date of any redemption of Interests or portion of Interests or the complete withdrawal by a Member, (3) the day as of which the Adviser’s or Sub-Adviser’s status as an investment adviser or sub-adviser, respectively, is terminated (provided that no Incentive Allocation will be payable to the Adviser or Sub-Adviser if such status is terminated voluntarily by the Adviser or Sub-Adviser, as the case may be, or by the Board of Managers of the Fund due to gross negligence or willful misconduct), or (4) such other date as determined by the Board of Managers.
See Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC, Schedule A (form filed 2009 as Exhibit (g)(2)).
A filed sub-advisory agreement pays a sub-adviser terminated mid-year an incentive fee through the termination date, 90 percent within 30 days and the balance after the audit.
In the event that the Sub-Adviser is terminated during a fiscal year, the Sub-Adviser will be entitled to receive an Incentive Fee calculated from January 1st through the termination date. Within thirty (30) days after the termination date, the Sub-Adviser will be paid 90% of the incentive fee calculated through the termination date; the balance will be paid within thirty (30) days after the completion of the Fund’s audit for the fiscal year.
See Bessemer Funds Trust, Form N-2, form of Sub-Advisory Agreement (Apr. 19, 2001), filed on EDGAR.
A filed fund LLC agreement admits a substitute special advisory member when the investment advisory agreement terminates.
If at any time the Investment Advisory Agreement between the Fund and the person then serving as Adviser terminates, the Board of Managers shall admit as a substitute Special Advisory Member, upon its signing this Agreement, such person as may be retained by the Fund to provide investment advisory services pursuant to an Investment Advisory Agreement, subject to the due approval of such Investment Advisory Agreement with such person in accordance with the requirements of the 1940 Act.
See BACAP Opportunity Strategy, LLC, Limited Liability Company Agreement § 2.8, in Form N-2/A, Pre-Effective Amendment No. 1 (June 18, 2002).
6 Del. C. § 17-606(a) gives a partner entitled to a distribution the status and remedies of a creditor, subject to §§ 17-607 and 17-804.
(a) Subject to §§ 17-607 and 17-804 of this title, and unless otherwise provided in the partnership agreement, at the time a partner becomes entitled to receive a distribution, he or she has the status of, and is entitled to all remedies available to, a creditor of the limited partnership with respect to the distribution.
See 6 Del. C. § 17-606(a).
6 Del. C. § 17-804(a) sets the order of distribution in a winding up: creditors, then partners' distribution claims, then contributions and partnership interests.
(1) To creditors, including partners who are creditors, to the extent otherwise permitted by law, in satisfaction of liabilities of the limited partnership (whether by payment or the making of reasonable provision for payment thereof) other than liabilities for which reasonable provision for payment has been made and liabilities for distributions to partners and former partners under § 17-601 or § 17-604 of this title; (2) Unless otherwise provided in the partnership agreement, to partners and former partners in satisfaction of liabilities for distributions under § 17-601 or § 17-604 of this title; and (3) Unless otherwise provided in the partnership agreement, to partners first for the return of their contributions and second respecting their partnership interests, in the proportions in which the partners share in distributions.
See 6 Del. C. § 17-804(a)(1)–(3).
6 Del. C. § 17-607(a) bars a distribution to the extent that afterward the partnership's liabilities, other than liabilities to partners on account of their interests and non-recourse liabilities, exceed the fair value of its assets, and excludes reasonable compensation for services from the term distribution.
(a) A limited partnership shall not make a distribution to a partner to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the limited partnership, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specified property of the limited partnership, exceed the fair value of the assets of the limited partnership, except that the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in the assets of the limited partnership only to the extent that the fair value of that property exceeds that liability. For purposes of this subsection (a), the term “distribution” shall not include amounts constituting reasonable compensation for present or past services or reasonable payments made in the ordinary course of business pursuant to a bona fide retirement plan or other benefits program.
See 6 Del. C. § 17-607(a).
6 Del. C. § 17-607(b) makes a limited partner who knowingly receives a distribution in violation of § 17-607(a) liable for it.
(b) A limited partner who receives a distribution in violation of subsection (a) of this section, and who knew at the time of the distribution that the distribution violated subsection (a) of this section, shall be liable to the limited partnership for the amount of the distribution.
See 6 Del. C. § 17-607(b).
6 Del. C. § 17-607(c) ends a limited partner's liability for a distribution three years after the distribution unless otherwise agreed.
(c) Unless otherwise agreed, a limited partner who receives a distribution from a limited partnership shall have no liability under this chapter or other applicable law for the amount of the distribution after the expiration of 3 years from the date of the distribution.
See 6 Del. C. § 17-607(c).
Is a performance allocation still a performance fee under the Advisers Act?
Yes. Section 205(a)(1) reaches compensation based on a share of capital gains or appreciation, and the SEC describes carried interest as a form of performance-based compensation, so an allocation needs the same qualified-client exemption as a fee unless the fund relies on section 3(c)(7).
The rule. Section 205(a)(1) prohibits a registered adviser's contract that “provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client;” The SEC's 2026 proposing release says: “Carried interest is a form of performance-based compensation where a portion of profits is allocated to a general partner before the remaining profits are distributed to limited partners.” Nothing in the statute turns on whether the share is paid in cash or credited to a capital account.
Qualified clients and the 3(c)(1) look-through. Rule 205-3 permits the compensation when the client is a qualified client. For a fund relying on section 3(c)(1), each equity owner charged the performance compensation is treated as the client, except the adviser itself and owners not charged. Under SEC Order IA-6961, dated April 28, 2026, the two dollar tests are at least $1,400,000 under the adviser's management immediately after entering the contract, or a net worth the adviser reasonably believes is more than $2,700,000 immediately before. Those are two routes, not the whole definition: a qualified purchaser also qualifies, as do certain executive officers and investment personnel of the adviser, and a natural person's primary residence is left out of net worth. The order took effect on June 29, 2026 and does not generally apply to contracts entered into before then, subject to the rule's transition provisions. Under those provisions, a person who becomes a party later, including a new equity owner of the fund, is tested under the thresholds in effect at that time. A sub-adviser paid by the sponsor should not assume that its contract with the sponsor removes the need to test the fund's investors: the look-through treats the fund's charged equity owners as the clients.
The 3(c)(7) exception. The prohibition does not apply to a contract with a fund excepted under section 3(c)(7).
A pending change. In a proposal published in the Federal Register on October 6, 2026, with comments due December 7, 2026, the SEC would revise the qualified-client definition to include accredited investors. As of this guide's date it is a proposal, not law.
Sources for this answer
Section 205(a)(1) reaches advisory contracts that provide for compensation based on a share of capital gains or capital appreciation of the client's funds.
No investment adviser registered or required to be registered with the Commission shall enter into, extend, or renew any investment advisory contract, or in any way perform any investment advisory contract entered into, extended, or renewed on or after November 1, 1940, if such contract- (1) provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client;
See 15 U.S.C. § 80b-5(a)(1).
The SEC describes carried interest as a form of performance-based compensation in which a portion of profits is allocated to a general partner.
Carried interest is a form of performance-based compensation where a portion of profits is allocated to a general partner before the remaining profits are distributed to limited partners.
See Investment Adviser Performance-Based Compensation Modernization, Release Nos. 33-11443; IA-7022, at n.243 (proposed 2026).
Rule 205-3 permits a performance-based advisory contract when the client is a qualified client.
The provisions of section 205(a)(1) of the Act (15 U.S.C. 80b-5(a)(1)) will not be deemed to prohibit an investment adviser from entering into, performing, renewing or extending an investment advisory contract that provides for compensation to the investment adviser on the basis of a share of the capital gains upon, or the capital appreciation of, the funds, or any portion of the funds, of a client, Provided, That the client entering into the contract subject to this section is a qualified client, as defined in paragraph (d)(1) of this section.
See 17 C.F.R. § 275.205-3(a).
Rule 205-3(d)(1) defines a qualified client to include the assets-under-management and net-worth tests, with the primary residence excluded from a natural person's net worth, and a qualified purchaser.
(d) Definitions. For the purposes of this section: (1) The term qualified client means: (i) A natural person who, or a company that, immediately after entering into the contract has, under the management of the investment adviser, at least the applicable dollar amount specified in the most recent order; (ii) A natural person who, or a company that, the investment adviser entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract, either: (A) Has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than the applicable dollar amount specified in the most recent order. For purposes of calculating a natural person's net worth: (1) The person's primary residence must not be included as an asset;
See 17 C.F.R. § 275.205-3(d)(1)(i)–(ii); see id. § 275.205-3(d)(1)(ii)(B) (qualified purchaser), (d)(1)(iii) (adviser personnel).
Rule 205-3(b) treats each equity owner of a private investment company as the client, except the adviser and owners not charged performance compensation.
(b) Identification of the client. In the case of a private investment company, as defined in paragraph (d)(3) of this section, an investment company registered under the Investment Company Act of 1940, or a business development company, as defined in section 202(a)(22) of the Act (15 U.S.C. 80b-2(a)(22)), each equity owner of any such company (except for the investment adviser entering into the contract and any other equity owners not charged a fee on the basis of a share of capital gains or capital appreciation) will be considered a client for purposes of paragraph (a) of this section.
See 17 C.F.R. § 275.205-3(b).
SEC Order IA-6961 sets the qualified-client assets-under-management threshold at $1,400,000 and the net-worth threshold at more than $2,700,000.
IT IS HEREBY ORDERED that, for purposes of rule 205-3(d)(1)(i) under the Advisers Act [17 CFR 275.205-3(d)(1)], a qualified client means a natural person who, or a company that, immediately after entering into the contract has at least $1,400,000 under the management of the investment adviser; and IT IS FURTHER ORDERED that, for purposes of rule 205-3(d)(1)(ii)(A) under the Advisers Act [17 CFR 275.205-3(d)(1)(ii)(A)], a qualified client means a natural person who, or a company that, the investment adviser entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract, has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $2,700,000.
See Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 Under the Investment Advisers Act of 1940, Advisers Act Release No. IA-6961, § IV (Apr. 28, 2026), 91 Fed. Reg. 23520 (May 1, 2026).
SEC Order IA-6961 is effective June 29, 2026 and generally does not apply retroactively to contracts entered into before that date.
This Order is effective as of June 29, 2026.
See Advisers Act Release No. IA-6961, Effective Date of the Order (Apr. 28, 2026).
Rule 205-3(c)(1) applies the conditions in effect when a new person, including a new equity owner of a private investment company, becomes a party.
(c) Transition rules—(1) Registered investment advisers. If a registered investment adviser entered into a contract and satisfied the conditions of this section that were in effect when the contract was entered into, the adviser will be considered to satisfy the conditions of this section; Provided, however, that if a natural person or company who was not a party to the contract becomes a party (including an equity owner of a private investment company advised by the adviser), the conditions of this section in effect at that time will apply with regard to that person or company.
See 17 C.F.R. § 275.205-3(c)(1).
Section 205(b)(4) excludes from the performance-fee prohibition an advisory contract with a company excepted under section 3(c)(7).
Paragraph (1) of subsection (a) shall not- (1) be construed to prohibit an investment advisory contract which provides for compensation based upon the total value of a fund averaged over a definite period, or as of definite dates, or taken as of a definite date; (2) apply to an investment advisory contract with- (A) an investment company registered under subchapter I of this chapter, or (B) any other person (except a trust, governmental plan, collective trust fund, or separate account referred to in section 80a–3(c)(11) of this title), provided that the contract relates to the investment of assets in excess of $1 million, if the contract provides for compensation based on the asset value of the company or fund under management averaged over a specified period and increasing and decreasing proportionately with the investment performance of the company or fund over a specified period in relation to the investment record of an appropriate index of securities prices or such other measure of investment performance as the Commission by rule, regulation, or order may specify; (3) apply with respect to any investment advisory contract between an investment adviser and a business development company, as defined in this subchapter, if (A) the compensation provided for in such contract does not exceed 20 per centum of the realized capital gains upon the funds of the business development company over a specified period or as of definite dates, computed net of all realized capital losses and unrealized capital depreciation, and the condition of section 80a–60(a)(4)(B)(iii) of this title is satisfied, and (B) the business development company does not have outstanding any option, warrant, or right issued pursuant to section 80a–60(a)(4)(B) of this title and does not have a profit-sharing plan described in section 80a–56(n) of this title; (4) apply to an investment advisory contract with a company excepted from the definition of an investment company under section 80a–3(c)(7) of this title; or
See 15 U.S.C. § 80b-5(b)(4).
The SEC's 2026 qualified-client proposal was published in the Federal Register on October 6, 2026, with comments due by December 7, 2026.
DATES: This release was published in the Federal Register on October 6, 2026. Comments should be received on or before December 7, 2026.
See Investment Adviser Performance-Based Compensation Modernization, Release Nos. 33-11443; IA-7022 (proposed 2026), Dates.
The SEC's 2026 proposal would add accredited investors to the qualified-client definition; it was published October 6, 2026 with comments due December 7, 2026.
The proposed rule amendments would also allow investment advisers to receive this compensation from additional clients by revising the rule’s “qualified client” definition to include investors that meet the “accredited investor” definition in Regulation D under the Securities Act of 1933.
See Investment Adviser Performance-Based Compensation Modernization, Release Nos. 33-11443; IA-7022 (proposed 2026), Summary.
What must the fund's offering documents and the adviser's Form ADV say about shared performance compensation?
The offering documents must describe the arrangement accurately and consistently with the partnership agreement, because an adviser to a pooled vehicle may not make a materially misleading statement to an investor or prospective investor. On Form ADV, the adviser reports performance-based fees, describes the conflicts they create in its brochure, and reports its and its related persons' ownership of the private fund.
Antifraud rule. Rule 206(4)-8 makes it fraudulent for an adviser to a pooled investment vehicle to make an untrue statement of a material fact, or to omit a material fact needed to make its statements not misleading, to any investor or prospective investor in the vehicle, or otherwise to engage in fraudulent, deceptive or manipulative conduct toward them. The rule covers each adviser to the fund, not only the sponsor.
Inconsistent documents. In Global Infrastructure Management (2021), the SEC found that a private fund adviser's offering memoranda and partnership agreements said different things about how management fees would be calculated after a partial disposition, and that the adviser lacked policies to confirm that its offering memorandum and partnership agreement were consistent on key points. The adviser agreed to a $4.5 million penalty and consented to findings that it violated Rule 206(4)-8, among other provisions. An adviser sharing in performance compensation should check that the offering memorandum, the partnership agreement and its own agreement describe the same base, rate, timing and termination terms. SEC staff have also reported that advisers did not adequately disclose economic relationships with select investors and others.
Form ADV. The Form ADV glossary defines a performance-based fee as a fee based on a share of capital gains on, or capital appreciation of, client assets, and Part 1A, Item 5.E asks the adviser to check performance-based fees if it is compensated that way. Part 2A, Item 6 requires the brochure to disclose performance-based fees and to explain the conflicts of managing accounts with and without them. For each private fund it advises, the adviser completes Section 7.B.(1) of Schedule D unless another SEC-registered adviser or SEC exempt reporting adviser reports the fund there, as may be the case for a subadviser, in which case it completes Section 7.B.(2) instead. Section 7.B.(1) asks for the approximate percentage of the fund beneficially owned by the adviser and its related persons, whether sales of a 3(c)(1) fund are limited to qualified clients, and whether the reporting adviser is a subadviser. A special limited partner interest is an ownership interest in the fund that may need to be reflected there. The question asks for approximate beneficial ownership, not a valuation, and a 20 percent performance share is not the same as 20 percent ownership of the fund; we found no SEC statement on how to measure a profits-only interest for that question, so the adviser should document the method it uses and confirm it with regulatory counsel.
Sources for this answer
Rule 206(4)-8 prohibits an adviser to a pooled investment vehicle from making materially misleading statements or omissions to investors or prospective investors.
(a) Prohibition. It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of section 206(4) of the Act (15 U.S.C. 80b-6(4)) for any investment adviser to a pooled investment vehicle to: (1) Make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading, to any investor or prospective investor in the pooled investment vehicle; or (2) Otherwise engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the pooled investment vehicle.
See 17 C.F.R. § 275.206(4)-8(a).
The SEC found that the adviser lacked reasonable policies to confirm that its LPAs and PPMs were consistent on key points, including how management fees were calculated after partial dispositions.
Global failed to have reasonable written policies and procedures in place to confirm that the LPA and PPM were consistent on key points, including in this instance regarding how management fees were calculated following a partial disposition of fund portfolio investments, and failed to have reasonable written policies and procedures addressing whether Global personnel were communicating accurate, consistent information to investors.
See In re Global Infrastructure Mgmt., LLC, Advisers Act Release No. 5930, ¶ 9 (Dec. 20, 2021).
The SEC announced that Global Infrastructure Management agreed to a $4.5 million penalty and consented to findings that it violated Advisers Act sections 206(2) and 206(4) and Rules 206(4)-7 and 206(4)-8.
Global consented to the entry of the SEC’s order finding that the firm violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 and 206(4)-8. Without admitting or denying the SEC’s findings, Global agreed to a cease-and-desist order, and to pay a $4.5 million penalty.
See SEC Press Release No. 2021-266 (Dec. 20, 2021).
SEC examination staff observed inadequate disclosure of economic relationships between private fund advisers and select investors or clients.
The staff observed private fund advisers that did not provide adequate disclosure about economic relationships between themselves and select investors or clients.
See SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds § II.A (June 23, 2020).
Form ADV Part 1A, Item 5.E asks how the adviser is compensated and lists performance-based fees as one of the boxes to check.
E. You are compensated for your investment advisory services by (check all that apply): (1) A percentage of assets under your management (2) Hourly charges (3) Subscription fees (for a newsletter or periodical) (4) Fixed fees (other than subscription fees) (5) Commissions (6) Performance-based fees (7) Other (specify): Regulatory Assets Under Management F. (1) Do you provide continuous and regular supervisory or management services to Yes No securities portfolios?
See SEC Form ADV, Part 1A, Item 5.E (SEC 1707 (07-24)).
The Form ADV glossary defines a performance-based fee, a term used in Part 1A, Item 5 and Part 2A, Item 6, as a fee based on a share of capital gains on, or capital appreciation of, client assets.
48. Performance-Based Fee: An investment advisory fee based on a share of capital gains on, or capital appreciation of, client assets. A fee that is based upon a percentage of assets that you manage is not a performance-based fee.
See SEC Form ADV, General Instructions, Glossary of Terms ¶ 48.
Form ADV Part 2A, Item 6 requires disclosure of performance-based fees and the conflicts of side-by-side management.
If you or any of your supervised persons accepts performance-based fees – that is, fees based on a share of capital gains on or capital appreciation of the assets of a client (such as a client that is a hedge fund or other pooled investment vehicle) – disclose this fact. If you or any of your supervised persons manage both accounts that are charged a performance-based fee and accounts that are charged another type of fee, such as an hourly or flat fee or an asset-based fee, disclose this fact. Explain the conflicts of interest that you or your supervised persons face by managing these accounts at the same time, including that you or your supervised persons have an incentive to favor accounts for which you or your supervised persons receive a performance-based fee, and describe generally how you address these conflicts.
See SEC Form ADV, Part 2A, Item 6.
Form ADV Part 1A, Item 7.B directs an adviser not to complete Section 7.B.(1) for a private fund that another SEC-registered adviser or exempt reporting adviser reports there, as with a subadviser, and to complete Section 7.B.(2) instead.
If you are registered or applying for registration with the SEC or reporting as an SEC exempt reporting adviser, and another SEC-registered adviser or SEC exempt reporting adviser reports this information with respect to any such private fund in Section 7.B.(1) of Schedule D of its Form ADV (e.g., if you are a subadviser), do not complete Section 7.B.(1) of Schedule D with respect to that private fund. You must, instead, complete Section 7.B.(2) of Schedule D.
See SEC Form ADV, Part 1A, Item 7.B (SEC 1707 (07-24)).
Schedule D, Section 7.B.(1) asks for the percentage of the private fund beneficially owned by the adviser and its related persons, whether sales of a 3(c)(1) fund are limited to qualified clients, and whether the adviser is a subadviser.
14. What is the approximate percentage of the private fund beneficially owned by you and your related persons: % 15. (a) What is the approximate percentage of the private fund beneficially owned (in the aggregate) by funds of funds: % 53 (b) If the private fund qualifies for the exclusion from the definition of investment company under section 3(c)(1) of the Investment Company Act of 1940, are sales of Yes No the fund limited to qualified clients? 16. What is the approximate percentage of the private fund beneficially owned by non-United States persons: % Your Advisory Services 17. (a) Are you a subadviser to this private fund?
See SEC Form ADV, Part 1A, Schedule D, Section 7.B.(1), Questions 14–17 (SEC 1707 (07-24)).
What do public filings show about how advisers share performance compensation?
Filed agreements show both routes in use: sub-advisers paid a share of the sponsor's fees, with direct-payment and anti-waiver protections, and advisers or sub-advisers holding non-voting special interests that receive incentive allocations, with prompt withdrawal and audit true-ups. These are mostly registered funds and business development companies, so they show drafting patterns rather than private-fund market frequency.
| Filing | Structure | What it shows |
|---|---|---|
| Hatteras fund of private equity funds, sub-advisory agreement (2009) | Asset-based fee paid by the adviser ; performance share allocated to the sub-adviser's own non-voting interests | Withdrawal of up to 95% on unaudited data, true-up after audit ; no allocation is payable for a period that ends because the sub-adviser resigns or is removed for gross negligence or willful misconduct. |
| Hatteras fund, proxy statement (2013) | The adviser held an incentive allocation account in the fund | A proposed transfer of that account to the buyer of the adviser's business was put to a member vote. |
| Advantage Advisers Xanthus Fund (2011) | The adviser, as special advisory member, receives the incentive allocation; separately, the sub-adviser is paid by the adviser out of its fee | The special advisory member may withdraw up to 100% on unaudited data, with an audit true-up ; the sub-adviser is paid within five business days after the adviser is paid. |
| BACAP Opportunity Strategy fund (2002) | Adviser is a non-voting special advisory member ; sub-adviser fee paid by the adviser, not the fund | Interest shares in profit only through the incentive allocation ; allocation may be withdrawn at any time after it is made. |
| BACAP Opportunity Strategy fund, prospectus (2003) | Later prospectus for the same fund | Repeats that the sub-advisory fee is paid by the adviser and not by the fund. |
| NB Crossroads Private Markets Fund V, a Neuberger Berman fund (2017) | Special limited partner of a master fund holds the carried interest | Investment professionals participate through the special limited partner ; discretionary tax distributions ; the special limited partner receives no carried interest until after the fourth anniversary of the final closing, except in respect of an investor's repurchase of its interest. |
| HMS Income Fund sub-advisory agreement (2012) | Sub-adviser receives half of the adviser's base and incentive fees | Pay-through within three business days; at the sub-adviser's request the adviser must arrange for the fund to pay it directly; no waiver of its share without its consent. |
| Griffin-Benefit Street Partners BDC (2015) | Sub-adviser receives half of the adviser's fees | Except as required by applicable law, rule or regulation, any deferral, reduction or waiver of the adviser's fees, of which the sub-adviser receives half, requires the sub-adviser's consent. |
| Ceres commodity pool management agreement (2022) | The partnership pays the trading advisor directly | Net assets determined with no adjustment for management, administrative, selling-agent or incentive fees ; ongoing fund expenses still charged against the advisor's share. |
| PGIM Private Credit Fund (2024) | Manager pays the subadviser part of its fees; nothing paid by the fund directly | Capital-gains incentive fee accrued but not paid on unrealized appreciation. |
| Phillips Edison – ARC REIT sub-advisory agreement (2010) | Advisor assigns the right to direct payment of a share of the incentive fee | The assignment gives the sub-advisor the right to be paid its share directly by the company rather than through the advisor. |
| meVC Draper Fisher Jurvetson Fund I (2000) | A corporate fund pays its adviser incentive compensation on realized gains | The adviser pays the sub-adviser part of the management fee and 90% of the carried interest it receives, by contract. |
| Bessemer Sand Hill Investors Fund II (2001) | Incentive fee paid by the fund; the manager intends to assign it to the sub-adviser | 90% after year-end, balance after audit ; a terminated sub-adviser is paid through the termination date on the same schedule. |
What the table does not show: how often private funds use either route, the size of advisers' shares in private funds, or how disputes over these terms have been resolved. We found no public data source for those points.
Sources for this answer
The 2009 sub-advisory agreement has the adviser pay the sub-adviser an asset-based fee and gives the sub-adviser an incentive allocation or fee under the fund's governing documents.
The Adviser will pay the Sub-Adviser a quarterly advisory fee with respect to the Fund equal to 0.625% on an annualized basis of the Net Asset Value of the Fund.
See Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC § 4 (form filed 2009 as Exhibit (g)(2)).
A 2013 proxy statement put to members the transfer of the adviser's incentive allocation account to the purchaser of the adviser's business.
The Fund's Board recommends that Members vote FOR the transfer of Hatteras Capital Investment Management, LLC's incentive allocation account to the Purchaser.
See Hatteras Global Private Equity Partners Institutional, LLC, Definitive Proxy Statement, Proposal 4 (2013).
A filed LLC agreement lets the special advisory member withdraw up to 100 percent of the incentive allocation on unaudited data, with a true-up after the audit.
(b) By the last business day of the month following the date on which an Incentive Allocation is made, the Special Advisory Member may withdraw up to 100% of the Incentive Allocation (computed on the basis of unaudited data) that was credited to the Special Advisory Account. Within 30 days after the completion of the audit of the books of the Company for the year in which allocations to the Special Advisory Account are made, the Company shall pay to the Special Advisory Member any additional amount of Incentive Allocation determined to be owed to the Special Advisory Member based on the audit, and the Special Advisory Member shall
See Advantage Advisers Xanthus Fund, L.L.C., Definitive Proxy Statement, Appendix (L.L.C. Agreement § 5.8(b)) (2011).
A 2002 registration statement states that the sub-advisory fee is paid by the adviser and not by the fund.
This fee is paid by the Adviser and not by the Fund.
See BACAP Opportunity Strategy, LLC, Form N-2/A, Pre-Effective Amendment No. 1 (June 18, 2002).
The 2003 prospectus repeats that the sub-advisory fee is paid by the adviser and not by the fund.
This fee is paid by the Adviser and not by the Fund.
See BACAP Opportunity Strategy, LLC, Prospectus (Form 497) (Dec. 29, 2003).
A filed registration statement defers distribution of the special limited partner's carried interest until after the fourth anniversary of the final closing.
The Special Limited Partner will not receive any of the carried interest that it may have earned until after the fourth anniversary of the final closing (the anticipated time frame in which all, or substantially all, of the Commitments that the Fund intends to invest will have been drawn), except in respect of an Investor’s repurchase of its Interest.
See NB Crossroads Private Markets Fund V (TE) LP, Form N-2, “Distributions” (2017), filed on EDGAR.
A filed BDC sub-advisory agreement gives the sub-adviser half of the adviser's base management and incentive fees.
In consideration for the Sub-Adviser’s provision of the Sub-Advisory Services hereunder, the Adviser shall pay the Sub-Adviser fifty percent (50%) of the fees (including without limitation the Base Management Fee and Incentive Fee), payable to the Adviser pursuant to Section 3 of the Advisory Agreement, payable no later than three (3) business days after receipt of such amounts by the Adviser from the BDC. At the Sub-Adviser’s request, the Adviser shall arrange for the fees payable to the Sub-Adviser hereunder to be paid to the Sub-Adviser directly by the BDC on the same day the BDC pays (or is obligated to pay) the Adviser its fees (including without limitation the Base Management Fee and Incentive Fee) under the Advisory Agreement. Pursuant to Section 3 of the Advisory Agreement, the Adviser has retained the right to elect to waive or defer all or a portion of the fees that would otherwise be paid to it. The Adviser shall not make any such election with respect to the Sub-Adviser’s portion of such fees, without the prior written consent of the Sub-Adviser.
See Form of Investment Sub-Advisory Agreement among HMS Adviser, LP, Main Street Capital Partners, LLC, Main Street Capital Corporation and HMS Income Fund, Inc. § 3 (2012), filed as Exhibit (g)(2).
A filed BDC registration statement requires the sub-adviser's consent to any deferral, reduction or waiver of the adviser's fees.
On an annualized basis, Benefit Street will be paid 50% of the fees payable to GBA under the investment advisory agreement with respect to each year, which fees are payable to Benefit Street quarterly in arrears. Except as required by applicable law, rule or regulation, any deferral, reduction, waiver or other modification of the fees to be paid to GBA (including, without limitation, the manner and timing by which such fees are paid or payable to GBA) will require the prior written consent of Benefit Street.
See Griffin-Benefit Street Partners BDC Corp., Form N-2/A, Pre-Effective Amendment No. 5 (Jan. 20, 2015).
The 2022 management agreement determines net assets with no adjustment for management, administrative, selling-agent or incentive fees.
“Net Assets of the Partnership” shall have the meaning set forth in Section 7(d)(2) of the Partnership Agreement without regard to further amendments thereto, provided that in determining the Net Assets of the Partnership on any date, no adjustment shall be made to reflect any distributions, redemptions, management fees, administrative fees, ongoing selling agent fees, or incentive fees accrued or payable as of the date of such determination.
See Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC § 3(b) (Aug. 3, 2022), filed as Exhibit 10.1.
A 2024 fund prospectus pays the subadviser through the manager and accrues but does not pay a capital-gains incentive fee on unrealized appreciation.
We will accrue, but will not pay, a capital gains incentive fee with respect to unrealized appreciation because a capital gains incentive fee would be owed to the Manager if we were to sell the relevant investment and realize a capital gain.
See PGIM Private Credit Fund, Prospectus (Apr. 29, 2024), filed on EDGAR.
A filed sub-advisory agreement assigns to the sub-advisor the right to direct payment from the company of a share of the incentive fee.
Subordinated Incentive Fee. The Advisor hereby assigns its right to receive direct payment from the Company of 85% of all Subordinated Incentive Fees payable pursuant to the Advisory Agreement, in whatever form payable by the Company (i.e., cash, Shares or a promissory note).
See First Amended and Restated Sub-advisory Agreement between American Realty Capital II Advisors, LLC and Phillips Edison NTR LLC § 5.6 (2010), filed as Exhibit 10.4.
A 2000 registration statement for a venture fund corporation has the adviser pay the sub-adviser part of the management fee and 90 percent of the carried interest the adviser receives.
As payment for its services as our investment sub-adviser, meVC Advisers has agreed to pay Draper Advisers 40% of the management fee, or an annual fee equal to 1.0% of our average weekly net assets, payable in monthly installments. meVC Advisers has also agreed to pay Draper Advisers additional compensation equal to 90% of any carried interest payment it receives from us.
See meVC Draper Fisher Jurvetson Fund I, Inc., Form N-2/A (Mar. 28, 2000).
A 2001 registration statement pays 90 percent of the incentive fee after year-end and the balance after the audit, and pays a terminated sub-adviser on the same schedule.
The Incentive Fee for the preceding fiscal year, if any, shall be paid by the Fund as follows: (i) 90% to be paid within 30 days after the Fund’s fiscal year-end; and (ii) the balance to be paid within 30 days after the completion of the Fund’s audit for the fiscal year.
See Bessemer Funds Trust, Form N-2 (Apr. 19, 2001), filed on EDGAR.
The 2009 sub-advisory agreement allows withdrawal of up to 95 percent of the incentive allocation on unaudited data, with a true-up in either direction after the audit.
After the close of an allocation period with respect to a Member, and subject to certain limitations, the Sub-Adviser may withdraw up to 95% of the Incentive Allocation, computed on the basis of unaudited data, that was credited to its Incentive Allocation Account with respect to such allocation period. The Fund will pay any balance, subject to audit adjustments, as promptly as practicable after the completion of the audit of the Fund’s books. As promptly as practicable after the completion of the audit of the books of the Fund for the year in which allocations to the Incentive Allocation Account are made, the Fund shall allocate to the Incentive Allocation Account any additional amount of Incentive Allocation determined to be owed to the Sub-Adviser based on such audit, and the Sub-Adviser shall remit to the Fund any excess amount of Incentive Allocation determined to be owed to the Fund.
See Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC, Schedule A (form filed 2009 as Exhibit (g)(2)).
A filed sub-advisory agreement gives the sub-adviser its performance share as an incentive allocation credited to non-voting fund interests held solely for that purpose.
The Sub-Adviser holds non-voting interests of limited liability company interest in the Fund (“Interests”) in an incentive allocation account (“Incentive Allocation Account”) solely for the purpose of receiving the Incentive Allocation with respect to the Fund.
See Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC, Schedule A (form filed 2009 as Exhibit (g)(2)).
The 2009 sub-advisory agreement ends an allocation period when the sub-adviser's status ends, but pays no allocation if the sub-adviser ends it voluntarily or the board ends it for gross negligence or willful misconduct.
An “allocation period” is a period commencing on commencement of operations of the Fund and, thereafter, each period commencing as of the day following the last day of the preceding allocation period and ending on the first to occur of (1) the last day of each calendar year, (2) the valuation date with respect to any repurchase of Interests or a portion of the Interests, or the day preceding the effective date of any redemption of Interests or portion of Interests or the complete withdrawal by a Member, (3) the day as of which the Adviser’s or Sub-Adviser’s status as an investment adviser or sub-adviser, respectively, is terminated (provided that no Incentive Allocation will be payable to the Adviser or Sub-Adviser if such status is terminated voluntarily by the Adviser or Sub-Adviser, as the case may be, or by the Board of Managers of the Fund due to gross negligence or willful misconduct), or (4) such other date as determined by the Board of Managers.
See Investment Sub-Advisory Agreement among Hatteras Global Private Equity Partners Institutional Fund, LLC, Hatteras Capital Investment Management, LLC and Capvent US Advisors LLC, Schedule A (form filed 2009 as Exhibit (g)(2)).
A filed sub-advisory agreement pays the sub-adviser out of the fee the investment adviser receives from the fund, within five business days of that receipt.
As compensation for the services rendered by the Sub-Adviser hereunder, the Investment Adviser agrees to pay the Sub-Adviser out of the fee it receives from the Fund pursuant to the investment advisory agreement between the Fund and the Investment Adviser a monthly fee computed at the annual rate of 0.30% of the net assets of the Fund, determined as of the start of business on the first business day of each month, after adjustment for any subscriptions effective on such day (the "Sub-Advisory Fee"). The Sub-Advisory Fee shall be payable monthly in arrears within five business days after the Investment Adviser's receipt of payment of its investment advisory fee from the Fund.
See Advantage Advisers Xanthus Fund, L.L.C., Definitive Proxy Statement, form of Sub-Advisory Agreement § 8 (2011).
A filed fund LLC agreement admits the adviser as a non-voting special advisory member that shares in profit only through the incentive allocation.
The interest in the Fund of the Special Advisory Member shall be non-voting and shall have no participation in the net profit or net loss of the Fund other than as a result of the Incentive Allocation.
See BACAP Opportunity Strategy, LLC, Limited Liability Company Agreement § 2.8, in Form N-2/A, Pre-Effective Amendment No. 1 (June 18, 2002).
A filed fund LLC agreement lets the adviser withdraw its incentive allocation at any time after it is made.
The Adviser may withdraw any Incentive Allocation credited to the Special Advisory Account at any time following the date on which the Incentive Allocation is made.
See BACAP Opportunity Strategy, LLC, Limited Liability Company Agreement § 4.6(d), in Form N-2/A, Pre-Effective Amendment No. 1 (June 18, 2002).
A filed registration statement states that the fund's key investment professionals share in the master fund's carried interest through ownership interests in its special limited partner.
In addition to investing in the Fund, all key investment professionals will participate, through ownership interests in the Special Limited Partner, in the carried interest of the Master Fund.
See NB Crossroads Private Markets Fund V (TE) LP, Form N-2, “Alignment of Interests” (2017), filed on EDGAR.
A filed registration statement lets the master fund's board make tax distributions to the special limited partner.
The Board of the Master Fund may in its sole discretion cause the Master Fund to distribute to the Special Limited Partner (each, a “Tax Distribution”) an amount designed to assist the Special Limited Partner (or its direct and indirect investors) in satisfying any income tax liability attributable to allocations of taxable income and gains of the Master Fund in any fiscal year for which such an accrual or such an allocation is required.
See NB Crossroads Private Markets Fund V (TE) LP, Form N-2, “Tax Distributions” (2017), filed on EDGAR.
In a three-party management agreement, the partnership itself pays the trading advisor its incentive fee and management fee.
In consideration of and as compensation for all of the services to be rendered by the Advisor to the Partnership under this Agreement, the Partnership shall pay the Advisor (i) an incentive fee payable annually equal to 20% of New Trading Profits (as such term is defined below) earned by the Advisor for the Partnership (the “Incentive Fee”) and (ii) a monthly fee for professional management services equal to 0.60% per year of the end of the month Net Asset Value of the Partnership allocated to the Advisor (computed monthly by multiplying the Net Asset Value of the Partnership allocated to the Advisor as of the last day of each month by 0.60% and dividing the result thereof by 12) (the “Management Fee”).
See Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC § 3(a) (Aug. 3, 2022), filed as Exhibit 10.1.
A 2024 fund prospectus states that the manager pays the subadviser a portion of its management and incentive fees and the fund pays the subadviser nothing directly.
The Manager will pay a portion of the Management Fee and Incentive Fee it receives from the Fund to the Subadviser. No advisory fees will be paid by the Fund directly to the Subadviser.
See PGIM Private Credit Fund, Prospectus, “Sub-Advisory Fee” (Apr. 29, 2024), filed on EDGAR.
A 2001 registration statement pays 90 percent of the annual incentive fee within 30 days after fiscal year-end and the balance after the audit, and states the manager's intention to assign the fee to the sub-adviser.
The Incentive Fee for the preceding fiscal year, if any, shall be paid by the Fund as follows: (i) 90% to be paid within 30 days after the Fund’s fiscal year-end; and (ii) the balance to be paid within 30 days after the completion of the Fund’s audit for the fiscal year. The Manager intends to assign the Incentive Fee to the Sub-Adviser so long as the Sub-Adviser acts in that role for the Fund.
See Bessemer Funds Trust, Form N-2 (Apr. 19, 2001), filed on EDGAR.
A filed sub-advisory agreement pays a sub-adviser terminated mid-year an incentive fee through the termination date, 90 percent within 30 days and the balance after the audit.
In the event that the Sub-Adviser is terminated during a fiscal year, the Sub-Adviser will be entitled to receive an Incentive Fee calculated from January 1st through the termination date. Within thirty (30) days after the termination date, the Sub-Adviser will be paid 90% of the incentive fee calculated through the termination date; the balance will be paid within thirty (30) days after the completion of the Fund’s audit for the fiscal year.
See Bessemer Funds Trust, Form N-2, form of Sub-Advisory Agreement (Apr. 19, 2001), filed on EDGAR.
A 2000 registration statement for a venture fund corporation pays its adviser annual incentive compensation of 20 percent of realized capital gains net of realized and unrealized losses.
We have also agreed to pay meVC Advisers annual incentive compensation equal to 20% of our annual realized capital gains net of realized and unrealized capital losses.
See meVC Draper Fisher Jurvetson Fund I, Inc., Form N-2/A (Mar. 28, 2000).
The 2022 management agreement attributes ongoing fund expenses, including offering and organizational expenses, to the assets the advisor manages, but excludes litigation not involving the advisor's activities.
Ongoing expenses shall be attributed to the assets managed by the Advisor (but shall be paid by the Partnership) based on the Advisor’s proportionate share of Net Assets of the Partnership. Ongoing expenses shall not include expenses of litigation not involving the activities of the Advisor on behalf of the Partnership. Ongoing expenses include offering and organizational expenses of the Partnership.
See Management Agreement among Ceres Managed Futures LLC, Ceres Tactical Commodity L.P. and EMC Capital Advisors, LLC § 3(c) (Aug. 3, 2022), filed as Exhibit 10.1.