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My hedge fund runs mostly illiquid strategies. We maintain some working capital and have a revolver in place. Employee pay would come from here. We also carefully track expected cash flow dates.
Our partners do get carry which is paid out upon investment exit.
Stakes in private companies, or privately placed debt/preferred that doesn’t have an active market, or public investments subject to lock up periods, etc.
Generally, the management fee is paid by investors during the scheduled capital calls. The carry is usually paid only when an exit is achieved and cash from the sale comes in the door. Although some funds might not pay carry on a per deal basis, so it might happen later.
@ib, I’m not entirely sure of the mechanics, but you’d have to look at the fund’s governing docs to see the mechanics for how money gets deployed.
The 2% annual management fee is taken on a monthly pro rata basis. The 20% performance fee depends on the fund. Some crystallize quarterly and some annually. Some have high water marks, etc. It’s subtracted from the gross return to the investor and yes the HF may need to liquidate shares to pay themselves the fee (just as they would need to do for investor redemptions). Typically there is some cash on hand for funding new investments, reallocations, etc. It’s all part of managing the allocated capital.