Calculation of the performance fee for a single strategy
The diamond Pigs performance fee is calculated by using a so-called “High Water Mark” (HWM). The HWM is defined as the share price of a specific strategy at the time you deposit funds in your wallet.
Example:
-Share price of strategy A: $1,000
-You deposit $5,000
-You get 5 shares of strategy A
-Your HWM is set at $1,000
This means the Diamond Pigs system keeps track of the HWM for each individual customer for a given moment in time. We actually keep track of the HWM for each individual strategy (more about that later).
At the end of the month, there is a "crystallization" moment. The system then looks at the share price of the strategy. There are two options:
-The share price is lower: Your HWM stays at the same level ($1,000 in the case above)
-The share price is higher: the performance fee is based on the increased value and a new HWM is set. Using the example above:
-The share price increases to $1,200. Profit is $200 per share
-You own 5 shares, so your profit is $1,000
-With a performance fee percentage of 15%, we will charge $150 performance fee that month
-Your new HWM is set to $1,200
Depositing or withdrawing funds from your wallet
Withdrawing funds from your wallet, triggers an additional “crystallization” moment. The performance fee will be based on the number of shares withdrawn from your wallet.
Depositing funds into your wallet does not trigger a crystallization moment but your HWM will be recalculated. The new HWM is based on the ratio between the funds in your wallet and the amount added.
Example:
-Your wallet has $6,000 (5 shares of $1,200)
-The HWM is $1,200
-Suppose the share price of strategy A is down to $1,100
-You add another $2000 to your wallet - this results in 2000/1100 = 1.82 additional shares
-You now have 6.82 shares and $6,000 in your wallet
-As you are adding some “cheaper” shares, the HWM is lowered from $1,200 to $1,173 ($6,000 / 6.82 shares)
Note this works both ways: if you deposit funds to your wallet when the share price is higher than your HWM, your new HWM will also be recalculated at a higher number based on the same ratio.
Switching a strategy
In most traditional investment firms, the HWM will not be maintained when switching from strategy A to strategy B. A strategy switch is considered as a full withdrawal from strategy A (and potentially paying the performance fee) and then buying shares in strategy B (resetting the HWM to the value of the strategy B share price). The result is that customers that invested in the past when the share price was high, then switched on a “dip” will start paying performance fees immediately when the share price starts to rise.
Diamond Pigs allow users to switch strategies and maintain their initial HWM. This is why we keep track of the HWM for each strategy even if you do not own any shares.
Example:
-The initial share price of strategy A: $1,000
-The initial share price of strategy B: $1,000
-You deposit $5,000
-You select strategy A
-You get 5 shares of strategy A, and 0 shares of strategy B
-Your HWM is set at $1,000 for both strategy A and B
Suppose the share price went down for both strategies A and B:
-New share price strategy A: $800 (losing $200)
-New share price strategy B: $900 (losing $100)
-Your wallet value has 5 shares of strategy A. Wallet value is $4,000
-Your HWM stays at $1,000
-You will not be charged a performance fee at months’ end
Suppose you decide changing strategy at this point from A to B:
-Your wallet is $4,000 (5 strategy A shares of $800 each)
-Strategy B has a share price of $900/share, so you will receive 4.444 shares
-Your HWM stays at $1,000 for both strategies A and B (as we at Diamond Pigs do not want to “punish” you for switching a strategy, even if you did not initially invest into strategy B)
Suppose the share price of strategy A and B go up a while later. At the end of the month, we have another crystallization moment.
Example:
-New share price strategy A: $1,050 (gaining $250)
-New share price strategy B: $1,300 (gaining $400)
-Your wallet value is $5,778 (4.444 shares of strategy B)
-Your HWM for strategy B is $1,000. This means you have a profit of $300 per share
-You have 4.444 shares, your profit is $1,334.
-Your monthly performance charge is 15% * $1.334 = $200
The example above shows a case where your wallet only grew from $5,000 to $5,778 over time (a net $778 gain after a dip to $4,000). However, you were charged a performance fee over a profit of $1,334. This is due to the fact you switched from strategy A to B at a moment strategy A had lost $200 while strategy B only lost $100 per share.
if we had used the “rules” from traditional investment funds you would have been charged a performance fee of over a $1,778 profit as your HWM would have been reset to $900.
The alternative: staying with strategy A would have resulted in a wallet value of $5,250 (5 shares of $1,050) and a profit of only $250.
Charging a performance fee even when your wallet has a negative result
There are also cases when your wallet value will be lower than your original investment and we still charge you a performance fee.
Example:
We start with the same as above: Investment in strategy A and switching to strategy B when the share price for A is $800 and the share price for B is $900.
If in the last step, the share price for strategy B would have been $1,100. The performance fee will be calculated as follows:
-New share price strategy A: $1,050
-New share price strategy B: $1,100
-Your wallet value is $4,888 (4.444 shares of strategy B)
-Your HWM for strategy B is $1,000. Your profit is $100 per share
-You have 4.444 shares, your profit is $444
-Your monthly performance charge is 15% * $444 = $66.67
In this second example, your wallet value is reduced over time from $5,000 to $4,000 and after the switch recovers to $4,888 (unfortunately still a loss of $112). However, the share price of strategy B ($1,100) is above your HWM ($1,000) and we will charge a performance fee of $66.67.