The independence and incentives of an asset manager are key factors towards efficient and productive portfolios (from the clients’ point of view). The asset manager’s compensation rule is maybe the most important component of his incentive structure, and as such it has to be analyzed and designed rigorously. Transparency is a core value at Baffin Advisors LLC, which is why we usually share our ideas and the thought process behind our decisions. Here we share our thoughts about the two basic compensation rules: fixed percentage of assets under management, versus performance fees (designed in a fairly complex manner, similar to the hedge fund practice). In this short paper we spell out the costs and benefit of each rule, and we share a quantitative exercise using a fixed portfolio of 8 asset classes over the last 8 years of market data. The compensation rule is even more important in the case of Baffin Advisors LLC relative to competitors, as we do not receive any other revenue besides our clients compensation.

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