> What your describing is very unlikely to actually happen
Things going up and then down?
Let's use the S&P 500 [1] from the beginning of 2007 through the end of 2015. Same 2 and 20 on $10 million investments.
9 years means $1.8 million of management fees. Gross gain is 44%. Assuming we reserved for management fees at the beginning, this means $1.8 million in profits over the $10 million (44% on $8.2 million), i.e. $0.36MM of carried interest. $2.16MM of fees with the VC carry-on-distribution model on $1.8MM of gains.
Our hedge fund manager, on the other hand, collects each year. The same 44% catches 3.5% in 2007 gains, 25.8% in 2013 gains and 11.4% in 2014. So $0.14MM of carry in 2013 and $0.24MM in 2014. $2.18MM of fees using the HF year-to-year assessment model on the same asset. That's almost a full percentage more in fees.
Note that this toy model understates the difference since when the manager moves assets to their carry pocket, they no longer compound for the investor.
VC having an accurate price. But, also those price swings in your example where odd. Useually you get steady gains then big drops followed by steady gains across years. Not big gains followed by years of losses. If nothing else inflation is pushing up prices.
+10% +90% -10% -10% -10% is odd. More likely pattern +10% -50% +10% +10% +10%
PS: You can model the s&p 500 for 10 years with each model and compare gains. But, try it every year from 1950 - 2015 not just one year.
Things going up and then down?
Let's use the S&P 500 [1] from the beginning of 2007 through the end of 2015. Same 2 and 20 on $10 million investments.
9 years means $1.8 million of management fees. Gross gain is 44%. Assuming we reserved for management fees at the beginning, this means $1.8 million in profits over the $10 million (44% on $8.2 million), i.e. $0.36MM of carried interest. $2.16MM of fees with the VC carry-on-distribution model on $1.8MM of gains.
Our hedge fund manager, on the other hand, collects each year. The same 44% catches 3.5% in 2007 gains, 25.8% in 2013 gains and 11.4% in 2014. So $0.14MM of carry in 2013 and $0.24MM in 2014. $2.18MM of fees using the HF year-to-year assessment model on the same asset. That's almost a full percentage more in fees.
Note that this toy model understates the difference since when the manager moves assets to their carry pocket, they no longer compound for the investor.
[1] http://www.1stock1.com/1stock1_141.htm