Item 5 – Fees and Compensation
Management and Performance Fees
Potomac River’s fees vary depending on our particular arrangements with each Client. Potomac
River does not have one fee schedule that applies to all Clients.
With regard to the Potomac River Funds, the Adviser charges a management fee of 2% per
annum of the assets under management. These fees are billed quarterly, in advance, at one-
fourth the annual rate. In addition, at year-end, the Adviser receives a performance allocation
equal to 20% of the net profits of the Funds, if any, subject to a loss carryforward provision
(sometimes called a “highwater mark”). In computing the performance allocation, Potomac River
includes realized and unrealized capital gains and losses. The Adviser, in its sole discretion, may
waive or reduce the management fees paid by certain types of investors in the Funds, including
members, principals, eligible employees or affiliates of the Adviser or the Funds’ General Partner.
For more information about the fees charged to the Potomac River Funds, as well as the terms
on which investors may withdraw capital or redeem or transfer their interests in the Funds, please
refer to the relevant Fund offering documentation.
Historically, Potomac River has entered into “side letter” agreements with investors in the Funds.
Under such agreements, an investor may receive benefits not generally available to other
investors, such as a payment or rebate from fees earned by the Adviser, preferential liquidity
terms, special rights to make future investments in the Funds or other managed accounts, more
detailed information regarding portfolio holdings or other rights. No side letters are in effect as of
the date of this Brochure but Potomac River may enter into such agreements at any time.
With respect to Separate Accounts, fees are negotiated on a case-by-case basis, depending on
the size and nature of the account and the nature of the services provided. Such fees may differ
from the fees charged to the Potomac River Funds, and may include a performance-based fee,
calculated as a percentage of a Client’s net profits and subject to a “highwater mark”, and may or
may not include an asset-based fee, which is typically billed quarterly, in advance.
Potomac River’s investment advisory agreements may contain written authorization permitting its
fees to be paid directly from each Client’s account. In such cases, Potomac River will send each
Client and the qualified custodian that the Client selects for such account an invoice showing the
amount of fees due along with the account value on which the fee is based and how the fee was
calculated, and Potomac River will deduct its fee directly from such Client’s account through the
qualified custodian holding such funds and investments. If not debited directly from the account,
Potomac River will invoice the Client for payment of fees. Potomac River urges its Clients to
review all statements received from their custodians for accuracy.
Other Fees and Expenses
In addition to any asset-based management or performance fees, Clients also are responsible for
investment expenses, such as commissions, interest on margin accounts and other
indebtedness, borrowing charges on securities sold short, transfer taxes, fees payable to
governments or agencies, custodial fees and bank service fees. Separate Accounts may also pay
for their allocation share of certain Adviser expenses. Please see Item 12 below for more
information about the Adviser’s brokerage practices. Certain Separate Accounts may pay a
separate asset based fee for certain reporting, technology, license fees or other expenses paid by
the Adviser in connection with such client.
As explained in the offering documents for the Potomac River Funds, the Funds are responsible
for the payment of operating expenses including, but not limited to, administrator, legal, auditing,
accounting (including outsourced accounting) and other professional expenses, administrative
expenses and directors and officers insurance (if any), communication expenses relating to
preparing, printing and distributing financial and other reports, prospectuses and similar
documents and other expenses related to the purchase, sale or transmittal of the Funds’ assets.
The Funds also may pay the Adviser’s middle/back office expenses (including trade capture
systems) and research expenses (including research-related travel, Bloomberg and similar
subscriptions and data services). Separate Accounts may also be responsible for certain
overhead and operating expenses, depending on the particular arrangements with such Clients.
An account’s differing expenses may be based on other factors such as size, trading restrictions
or fee arrangements which may result in differing performance results amount Separate Accounts
or between Separate Accounts and the Fund.
Beginning on January 1, 2015 the Adviser agreed to pay certain fixed operating expenses in
excess of 0.50% of the Fund’s net asset value as of the end of each month. The Advisor has
agreed to continue this practice until December 31, 2016 however, there is no guarantee that the
Adviser will choose to absorb any such costs in the future. Subsequently, a decision by the
Adviser to absorb costs that are ordinarily to be paid by the Funds will have the effect of slightly
improving the performance results of the Funds.
Certain Separate Accounts may be invested in investment vehicles or investment funds managed
by third-party asset managers. In such cases, the Separate Accounts will indirectly incur fees on
the underlying investment managers and brokerage and other transaction costs through its
underlying investments in third-party funds.