Fee Tiers & Incentive Structures Used by Emerging Managers to Build Momentum

‍By CV5 Capital — The Institutional Platform for Digital Asset & Hedge Fund Launches

At CV5 Capital, we see hundreds of fund launches each year across long/short equity, multi-strategy, digital assets, quantitative, and tokenized strategies. Across these launches, one consistent theme emerges: investors respond favourably to fee structures that reward early commitment, demonstrate manager conviction, and provide a clear path to institutionalisation.

Below is a comprehensive overview of the most effective fee tiers and incentive mechanisms that emerging managers use to catalyze momentum in their early years.

1. Founder Share Classes (Most Common for Emerging Managers)

Founder share classes are typically offered to the first $5–15 million of committed capital and are designed to reward early risk-takers.

Features:

• Reduced management fee (e.g., 0%–1.0% instead of 1.5%–2.0%)

• Reduced performance fee (e.g., 10%–15% instead of 20%)

• Evergreen or time-limited soft lock (to protect early AUM stability)

• Higher governance transparency

Why investors like it:

They gain a structural advantage relative to later investors and feel meaningfully aligned with the manager’s long-term success.

Why managers like it:

It accelerates time to break-even, improves early investor conversion rates, and supports the narrative that the fund is “open for business”.

2. Fee Step-Ups Based on AUM Milestones

Managers offer reduced fees initially, with fees increasing automatically as the fund grows.

Example structure:

• $0–$25M: 1% management, 10% performance

• $25–$75M: 1.5% management, 15% performance

• Above $75M: 2% management, 20% performance

Benefit:

Investors reward growth and operational scaling by accepting higher fees over time, while early investors enjoy preferred terms during the high-risk launch phase.

3. Early Investor Lock-In Rebates

Certain fee reductions only apply if an investor commits to a minimum holding period (e.g., 1–2 years).

Mechanics:

• Fee rebate (e.g., 50bps discount) after 12 months

• Retroactive performance fee discount if capital stays locked for 24 months

Why it works:

Helps stabilise AUM and gives the manager predictable capital to deploy during scaling phase.

4. Performance-First Structures (0% Management Fee)

These “eat-what-you-kill” structures remain compelling in competitive asset-raising environments.

Types:

• 0% management fee + 20%–30% performance fee

• 0% until $X AUM, then reverts to standard

Signals to investors:

High manager conviction, alignment, and willingness to grow alongside early LPs.

Common among:

Quant funds, crypto-native funds, or managers with significant personal capital invested.

5. Founding Investor Equity Participation

A more innovative structure increasingly used by digital-asset and tokenized funds.

Examples:

• Seeders earn revenue share from the management company

• Tokenized fund models where investors receive governance or utility rights (subject to regulatory structuring)

Benefit:

Transforms early investors into partners which dramatically increases conversion during the early roadshow.

6. Hurdle Rates and Tiered Performance Fees

Sophisticated performance mechanics designed to reinforce alignment.

Types of hurdles:

• Soft hurdle (performance fee only on outperformance)

• Hard hurdle (performance fee only above hurdle threshold)

• Tiered performance fees (e.g., 15% up to 10% return, 20% beyond)

Ideal for:

Macro, equity long/short, and global credit funds where alpha generation is market-cycle dependent.

7. Capacity Rights (“Guaranteed Allocations”)

To entice institutional seeders, managers offer rights to future capacity at favourable terms.

Example:

• First $10M receives guaranteed access to next $50M raise

• Early investors retain their fee discount permanently

• Lock capacity when strategy has limited scalability (e.g., DeFi arbitrage, altcoin liquidity mining, small-cap equity)

Investor value:

Long-term access to uncorrelated strategies without future dilution.

8. Drawdown-Based Discounts (Risk-Sensitive Incentives)

Some managers provide dynamic fee concessions tied to volatility or strategy drawdowns.

Example:

• 50bps management fee reduction if monthly drawdown exceeds X%

• Reset of performance fee tiers following significant market drawdown

Purpose:

Demonstrates accountability and fosters investor trust during difficult market conditions.

The CV5 Capital Perspective: What Actually Works in Today’s Market

Across our platform, we observe clear patterns:

Most effective for raising first $5–10M:

• Founder class

• 0% management fee for first 12–24 months

• Hard lock-ins for reduced fees

Most effective for raising $10–50M:

• AUM-based fee step-ups

• Capacity rights

• Hurdle-based performance tiers

• Equity participation or revenue share

Most effective for institutional allocators (> $50M):

• Clean, simple fee terms

• Institutional governance, valuations, and reporting

• Demonstrated track record from the initial share class

• Optional institutional class with standard 2/20

Institutions value predictability, transparency, and governance far more than fee gimmicks. The early incentives are primarily about momentum.

How CV5 Capital Helps Managers Implement These Fee Strategies

CV5 Capital supports emerging managers globally by providing:

1. Turnkey Fund Setup (2–3 Weeks)

• Cayman Section 4(3) or Registered Funds

• Segregated portfolios under CV5 or CV5 Digital

• Bespoke multi-share-class fee structures

2. Institutional Governance

• Independent directors

• Valuation, risk, and compliance frameworks

• Administrator and audit integration

3. Investor Structuring Support

• US and non-US investor classes

• K-1 and PFIC preparation (where needed)

• Side letters and seed investor agreements

4. Marketing & Capital Introduction Support

• Pitch materials, website, DDQ packages

• Access to our global network of family offices and funds

• Positioning and narrative development

Conclusion

In a competitive hedge fund environment, fee structures are no longer binary decisions, they are powerful tools for momentum, alignment, and investor psychology. Emerging managers who strategically utilise founder classes, tiered fees, and capacity rights consistently raise capital faster and institutionalise sooner.

CV5 Capital helps managers design, structure, and implement these fee incentives within an institutional Cayman fund platform, allowing them to focus on what matters most: generating performance. For our hedge fund terms questionnaire, please click here: https://cv5capital.typeform.com/fundformation

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