Crystallization of fees
Investors typically pay an “incentive fee” to the fund manager to account for profit made by the fund and allocated to investors. Typically this is charged as a percentage of profit, such as 20%. The fee is generally charged quarterly or yearly. If the fund’s allocation period is shorter than the fee period, the fee is accrued over several allocation periods. The fee is said to be uncrystallized as it accrues.
If the investor redeems capital during the fee accrual period, this may affect the amount of its incentive fee. To make sure that it receives all of the incentive fee due to it, the fund can require the investor to pay a portion of its management fee whenever it redeems capital. This is referred to as crystallizing the fees.