Federation Asset Management’s mea culpa

Federation Asset Management is reformed, according to a letter to its investors signed off by CEO Cameron Brownjohn. The firm's come to Jesus moment arrived – ever timely – after it stupidly sank 65 per cent of its flagship evergreen fund, Federation Alternative Investments II, into logistics business Sendle, which is now in liquidation. 

In the letter, Brownjohn conceded Federation made a "bad investment" – which will not go down as the most searching piece of self-criticism in the history of funds management – and that the firm is focused on doing better for its clients. Doing better, in Federation's telling, includes a magnanimous confirmation that it won't extract any benefit from allocating to Sendle, and that it has agreed to write off performance fees that were otherwise owed to it. But how is it that Federation could've accrued performance fees from a fund it has decimated? 

Federation's fund uses what the industry calls a deal-by-deal carry structure. Under that fee model, each investment is assessed in isolation against a hurdle rate – clear it and the manager gets paid, regardless of what the rest of the portfolio returns. 

Losses on one deal also have no bearing on what the manager earns from another – in industry parlance, non-netting. The manager effectively holds a portfolio of call options on each deal's upside. The fund investor, meanwhile, bears all the downside.