# Reviewing the Endaoment Management Fee Structure

## Summary

The current fee structure for the ENS DAO Endowment — *0.5% AUM fee (capped at $100M) plus 10% performance fee on DeFi yield* — has resulted in an average **net APY lower than staked ETH** [[1](https://docs.google.com/spreadsheets/d/1_790l0B0_TUe4IuVbPLXbn_xflJXNATEk6sLtmThbHA/edit?gid=1059213459#gid=1059213459), [2](https://lookerstudio.google.com/u/0/reporting/455e7884-3a66-4dff-97cf-74cb9c1de98a/page/9XwGF)] — despite the DAO bearing both management and performance costs.

This outcome stems from the DAO’s **conservative risk profile**, which keeps portfolio yields close to the IPS benchmark. Under the current model, this means the DAO will almost always underperform the benchmark **after fees**.

To address this misalignment, two alternative models are proposed to ensure fairer incentives and closer alignment between cost, performance, and risk.

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## Decaying AUM-only fee

TLDR
* **Structure:** Single decaying AUM fee (0.5% at $100M, decreasing with AUM growth).
* **Last 12 months cost:** **≈ $510K** → **$317K less** than current.
* **Outcome:** Simple, predictable, and better aligned with ENS’s capital-preservation profile.

### Rationale

1. **Better aligned with ENS’s risk profile:** Since the Endowment targets stable, slightly above benchmark-level returns, a performance fee penalizes prudent management.
2. **Predictable and transparent:** A single AUM-based fee makes costs fixed and easy to forecast, independent of market performance.
3. **Scales efficiently:** As AUM grows, the marginal cost of management falls — the decaying formula reflects this.
4. **Benchmark-consistent:** Keeps more yield within the DAO by avoiding fees when returns simply match the IPS benchmark.
5. **Simpler oversight:** Removes complex performance calculations and simplifies stakeholder review.

### Implementation

The decaying fee applies a continuous curve, ensuring fairness as AUM grows. The monthly fee rate is calculated as:

$$
\text{f}_{monthly} = \min\left(f_{\min},\ \frac{s}{(\text{AUM})^{p}}\right)
$$

Where:

* **f_monthly** — fee rate (e.g. 0.005 for 0.5%)
* **s** — scaling factor
* **p** — power exponent controlling the curve shape
* **f_min** — minimum fee rate (e.g. 0.005 for 0.5%)
* **AUM** — assets under management

**Suggested parameters:**

* **s = 50** — sets the $100M minimum fee cap
* **p = 0.5**
* **f_min = 0.5%**

Yielding the simple formula:

$$
\text{f}_{monthly} = \min\left(0.5\%,\ \frac{50}{\sqrt{\text{AUM}}}\right)
$$

**Examples:**

* $100M AUM → 0.5% fee = $500k annualized
* $400M AUM → 0.25% fee = $1M annualized

This ensures fair scaling without complexity, keeping operational costs predictable while rewarding capital efficiency.

---

## Hurdle rate addition

TLDR
* **Structure:** Same 0.5% AUM fee + **10% performance fee only on returns above the benchmark.**
* **Last 12 months cost:** **≈ $501K** → **$326K less** than current, and **≈$9K less** than AUM-only.
* **Outcome:** Keeps incentives for outperformance, but adds complexity and some risk of yield-chasing.

### Rationale

Introducing a **hurdle rate** provides a balanced way to retain performance incentives **only when true outperformance occurs**. It ensures kpk is rewarded for delivering returns above the IPS benchmark, while the DAO avoids paying performance fees for beta exposure or underperformance.

Key benefits:

1. **Performance Alignment:** Fees apply only when the Endowment outperforms the benchmark (currently the 60/40 ETH–stable on-chain rate mix).
2. **Fair Compensation:** Encourages active management and alpha generation, while avoiding unnecessary performance fees in stagnant or conservative market periods.
3. **Consistency with IPS:** Ties evaluation directly to the metrics ENS has already defined in its investment policy.

Downsides

1. **Added Complexity:** Requires precise benchmark tracking, accurate performance measurement, and regular validation — increasing operational and reporting overhead.
2. **Incentive Misalignment Risk:** The Endowment’s primary goal is capital preservation and steady growth. A performance fee tied to APY may encourage yield-seeking behavior, which can conflict with this conservative risk profile.
### Implementation

* Maintain the current AUM fee (0.5% fee, capped at $100M AUM).
* Add a **10% performance fee on returns of the entire portifolio, exceeding the IPS benchmarks**.
* Define clear parameters for benchmark calculation, compounding period, and crystallization frequency (e.g., quarterly).

Mathematically:

R_p = portfolio return (in decimal, e.g. 0.06 for 6%)
R_b = benchmark return (e.g. 0.05 for 5%)

* If $$R_p \le R_b$$ performance fee = 0
* If $$R_p > R_b$$ performance fee = $$\text({R}_p - \text{R}_b) \times \text{AUM} \times 10\% $$

---

## Comparison and recommendation

| Category | Current | Proposed (Decaying AUM-only) | Alternative (AUM + Hurdle Rate) |
| ---------------------------- | ------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- |
| **AUM Fee** | 0.5% (capped at $100M) | 0.5% until $100M, then progressively decreases as AUM grows (formula-based) | 0.5% (capped at $100M) |
| **Performance Fee** | 10% | None | 10% **only on returns exceeding the IPS benchmark** |
| **Complexity** | Moderate — two fee components but straightforward structure | Very low — simple, transparent, and easy to audit | Higher — requires benchmark tracking and periodic performance validation |
| **Incentive Alignment** | Encourages yield-seeking behavior, which can conflict with ENS’s conservative profile | Prioritizes stability and capital preservation, aligned with IPS goals | Rewards true outperformance but may partially reintroduce short-term yield incentives |
| **Expected Cost Efficiency** | High fees relative to net yield; consistent underperformance vs. benchmark after fees | Lower and more predictable costs; improves net returns within benchmark range | Slightly higher cost than AUM-only but justified if consistent alpha is achieved |
| **Governance Simplicity** | Clear but requires monitoring both fee components | Simplest structure; minimal governance overhead | More complex accounting and reporting requirements |
| **Overall Fit for ENS** | Misaligned with risk profile — fees charged even for benchmark-level returns | Best fit — aligns incentives, simplicity, and sustainability | Viable middle ground — maintains upside incentive but adds complexity and minor misalignment risk |

[Here](https://docs.google.com/spreadsheets/d/1p_MEJM7xbXKaytFv6ul27nBc_5SvbnI28FlGOBS2tjw/edit?gid=0#gid=0) is a spreadsheet where simulations of different parameters can be run and compared with the existing fee structure.



**Recommendation:**
Adopt the **Decaying AUM-only model**, ensuring predictable costs, stronger alignment with ENS’s conservative IPS, and simpler governance oversight.

If, in the future, the IPS and treasury strategy are refined to target higher yields under a similar risk profile, even a modest **0.5% increase in APY** would make the **Hurdle Rate model** economically comparable to the AUM-only approach, offering a balanced path for improvement.


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## Next steps

* Gather feedback from delegates and kpk on both models.
* Discuss implementation timeline with kpk.