The Zero Management Fee, or How to Eat Doritos with a Spoon

Why do new fund managers offer lower fees as they market for the first time? Why do allocators not like apparently more favorable economics?

Imagine a first-time fund manager (no one ever asked them to become a fund manager) pitching the debut vehicle.

The newbie hath lurked the limited partner (LP) LinkedIn posts and whatnot and sat through panels where institutional allocators in unbearable, surgical voices say things like “We’re really concerned about the asset accumulation game,” and “Alignment matters more than ever for us.”

So when the newbie finally gets on a call with an allocator, and the allocator asks about the management fee, the newbie says it: zero.

Or some carefully workshopped variation of “We’ll only draw what we need.” Maybe the newbie throws in extra carry, too, for good measure.

No Fun Snacking

This is the part where I tell you about my cousin and the Doritos.

My cousin grew up in a village two hours north of Lahore. My uncle (her father) is more or less a subsistence farmer, the way my grandfather was before him and his father before him—the family’s vocational aperture more or less fixed for several generations to modest (but extremely productive) interfluvial fields of sugar cane, rice paddies, and wheat in the northern Punjab.

She came to the United States a few years ago on the back of the same post-1965 migratory churn (globalization, the gravitational pull of upward mobility, etc.) that has now stocked a meaningful fraction of Queens and Brooklyn and much of the eastern Bay Area with immigrants.

She is the loveliest person, and we get along well. Her English is very limited, but my Punjabi holds pretty well, and so we communicate in the warm grammatical drift of the diaspora.

She visited recently. There was a bowl of Doritos on the coffee table, and when she reached for them, she did not use her hands.

She used a spoon.¹

And said spoon was being used to extract cool ranch-dust-covered triangular corn chips from a bowl one at a time. The labor demanded a significant amount of concentration, obviously because the tool of her choice was not fit for the task.

But her belief, as it were, is that employing such a tool that is not necessarily an intuitive fit for the task misses the point. The greater outcome is successfully being perceived as a legitimate entrant into the world of modernity by way of not using hands to eat food.

To any American watching, this would be bizarre, the way you’d register seeing someone eat a pizza slice with a knife and fork (Europeans do this I guess?). To me, watching her, it registered as something closer to as cringy but also sad, because I understood that she was doing it for me. The lofty, more “civilized” cousin.

I broke the joy of casual snacking. Have the stakes for eating ever been so high? Modernity can be so taxing!

(I am, in this story, the LP.)

The Overkill

There is a name for this. Linguists call it “hypercorrection:” the phenomenon where a speaker, anxious about command of a prestige dialect, applies its rules so aggressively that they violate them.

Source: https://www.acelinguist.com/2017/12/whomstdve-guessed-it.html

Children do it when they say “I eated my cereal”—a perfectly logical extension of the rule for past-tense conjugation—which nevertheless marks them, instantly, as insufficiently-conditioned English speakers. I think that’s more so because of ignorance than an attempt to be perceived as fancy or educated.

It’s funnier when adults do it.

Like when they hyper-enunciate the “t” in “often,” or when they say “between you and I.” I guess I do this too.

My cousin’s spoon was the same gesture in a different domain. Somewhere along the route she had absorbed the rule that modern people (a trope with a long imperial pedigree) do not eat with their hands.

She lacked the surrounding cultural context that would guide a more nuanced application of the rule, and so the rule became calcified to an unusual degree. I suppose “being modern” means following rules but also knowing when to break them.

Doritos are finger food. Everyone knows this. Everyone, that is, who is already “inside.”

She quickly figured “being modern” wasn’t worth the inconvenience at the moment. The chips were falling off the curved bowl and dropping back into the pile, in a way I think she found mildly humiliating. Then she defaulted, with visible relief, to her hands.

We kept talking, and the moment passed.

The Spoon Fed Emerging Manager

But I have been thinking about it since, because I keep seeing some form of hypercorrection in conversations with first-time fund managers who, in their attempt to signal alignment with the LP class, offer to charge zero management fees.

The surface logic is impeccable. LPs complain about management fees. LPs say carry is what should pay the GP. LPs reward alignment. So there are a small bevy of options: charge less, charge nothing, etc.

The ne’er-do-well first-timer might even throw in a larger slice of the carried interest (say 25% instead of the standard 20%) which sounds generous and is in fact the wrong answer.

The LP does not want a manager who cannot pay rent. The LP wants a manager who is incentivized correctly, which is a different and frankly more boring thing than a manager who is performatively self-flagellating.

The carry is the upside; the management fee is the keep-the-lights-on and the feed-your-analyst-food thingamajig. A new GP waiving the fee is not demonstrating alignment so much as demonstrating that they have not yet understood what alignment is for. They are, in the most literal possible sense, eating the Doritos with a spoon.

And here is where the irony folds back on itself, recursively, because the LP—I—am the reason this happens. My cousin reached for the spoon because I was watching. The new managers waive the fee because they are imagining the room of allocators they want to be in. The hypercorrection is downstream of the audience.

We see “alignment” enough times in enough quarterly letters and panel transcripts and gated think-pieces that some twenty-eight-year-old launching the first fund decides the safest possible move is to eat free for ten years.

The further, sharper irony is this: the more aggressively a first-time manager underprices the fee, the more an attentive LP should actually worry.

Not because cheap is bad (cheap, in isolation, is fine) but because the gesture itself signals that the manager is optimizing for legibility to the LP rather than for the sustainability of the fund, the multi-decade career, the third and fourth and fifth vehicles that are the entire point of the exercise.

The newbies are using the spoon. They are saying, unprompted, that they have read the etiquette book and have annotated it (or do something gunner law students do, like use multiple highlighters, share fake notes to throw off peers who missed class, etc.).

They are saying, as such, without meaning to, that they are not true members of the investment management world.

The move, it turns out, is to charge a reasonable fee and explain, plainly, why it is needed. Just eat the Doritos with the hands and let the fingers turn yellow!

1. For context, wheat, known as “kanak,” is king in the Punjab, and however it is processed, the food made from kanak is always eaten by hand. So spoons are often an anomaly unless used for more liquid-like food.