Item 5 – Fees and Compensation
The precise amount of, and the method of calculation and payment of, any fees paid by a Fund to
Convexity for advisory services are established by Convexity and are set forth in the Fund’s
confidential offering documents, organizational documents and/or other documentation, as
applicable (the “Fund Documents”). The relevant Fund Documents are received by each investor
prior to investment in the applicable Feeder Vehicle. The descriptions below of these fees are brief
summaries and are qualified in their entirety by such documentation. The fees described below
are non-negotiable; however, Convexity in its discretion may elect to reduce, waive or calculate
differently such fees with respect to any investor in a Fund, subject in the case of the Offshore
Fund to a “most favored nation” provision in respect of fees set out in the Offshore Fund’s Fund
Documents. The fee structures described below may be modified from time to time.
Convexity receives from the Offshore Fund a combination of an asset-based management fee and
an incentive fee (each described below) as compensation for investment advisory and other
services provided to the Offshore Fund. As of the date of this brochure, Convexity does not receive
advisory fees for services provided to the U.S. Fund, whose investors are current or former
Convexity personnel and related persons, or from the other Funds comprising the master fund-
feeder fund structure.
Management Fee:
Convexity is paid a quarterly asset-based fee of 0.3125% (1.25% annually) from the Offshore
Fund’s assets (the “Management Fee”). The Management Fee paid by the Offshore Fund is
indirectly borne by investors in the Offshore Fund. The Management Fee is paid in advance on
the second day of each Measuring Quarter. The term “Measuring Quarter”, as used herein, means
the period beginning as of immediately after 4:00 p.m. ET on the last day of each calendar quarter
(i.e., each March 31, June 30, September 30 and December 31) and ending as of 4:00 p.m. ET on
the last day of the next calendar quarter. Notwithstanding the foregoing, the last Measuring
Quarter of the Offshore Fund will end as of 4:00 p.m. ET on the date the Offshore Fund is dissolved
in accordance with its limited partnership agreement.
Incentive Fee:
Convexity is paid a performance-based fee of 20% of the net returns generated above the returns
of the benchmarks applicable to outstanding interests (“Interests”) in the Offshore Fund (the
“Incentive Fee”). The Incentive Fee expense is allocated among the capital accounts of the
investors in the Offshore Fund as described in its Fund Documents. The Incentive Fee accrues
annually (as of the end of the Measuring Quarter that closes on the last day of the relevant fiscal
year) or, in respect of withdrawals, at the time of withdrawal, all subject to the high water mark
and clawback arrangement described below. Because of the Offshore Fund’s clawback
arrangement, the Incentive Fee is generally not paid to Convexity at the time of such initial
accruals, but is held back in clawback accounts and paid at the end of the following fiscal year,
subject to prior reallocation under the clawback arrangement described below. The Incentive Fee
would also be paid to Convexity upon dissolution of the Offshore Fund or termination of the
Offshore Fund’s investment management agreement with Convexity.
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Incentive Fee Clawback Arrangement:
The Offshore Fund’s clawback provision (together with its loss recovery or “high-water”
mechanic) is intended to reduce the risk that an Interest will bear Incentive Fees of more than
20% of the cumulative net returns generated above the returns of the benchmark applicable to that
Interest over the period when the Interest is outstanding (disregarding any portion of an Interest
attributable to a previous withdrawal). One hundred percent (100%) of the Incentive Fees in
respect of each Interest for a year (or a relevant portion thereof) is retained, generally for one year,
in a separate clawback account for each Interest (subject to special rules for withdrawals,
dissolution of the Offshore Fund or termination of the Offshore Fund’s investment management
agreement with Convexity). If “relative value performance” is negative in respect of the Interest
during the holdback period (that is, if the total amount allocated to the Interest (disregarding the
applicable Incentive Fee) is less than the benchmark return applicable to such Interest), the
clawback account will be debited to the investor’s credit at the 20% Incentive Fee rate. Effectively,
this operates like a negative incentive fee to the extent of the clawback account balance. Any
Incentive Fees retained in clawback accounts and not returned to investors at the end of the year
will be distributed to Convexity.
High Water Mark for Incentive Fee:
The Offshore Fund’s high water mark uses a loss recovery account mechanic that applies on an
Interest-by-Interest basis if all amounts in the clawback accounts (if any) for the Interest have been
returned to the investor’s capital account, as described above. No Incentive Fee will be earned
with respect to an Interest until the loss recovery account’s balance has been reduced to zero. A
positive balance in a loss recovery account will be adjusted for withdrawals of capital in
accordance with the Funds’ withdrawal provisions.
Fund Expenses:
A Fund bears its own operating and other expenses including (as applicable), but not limited to,
investment and trading-related expenses (e.g., brokerage and futures commission merchant
commissions, expenses relating to short sales, clearing and settlement charges (including, without
limitation, give-ups), the fees and other costs and expenses related to trading on (or pursuant to the
rule of) exchanges, swap execution facilities and other venues, custodial fees, interest expenses
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