Definition of performance fees

A performance fee is a sum paid to the manager of an investment vehicle and is based on outperformance of a stated benchmark. Performance fees are most often associated with hedge funds although they have been applied to other investment vehicles such as investment trusts. Hedge fund performance fees have been notoriously generous to hedge fund managers who have typically been able to charge investors on a "2 and 20" structure of 2 per cent of the invested amount per year plus 20 per cent of any outperformance (although this has been eroded in recent years). Investment advisers counsel investors to check that any chosen benchmark is relevant to the kinds of investment being made by the fund. Also, investors should ensure that the performance fee structure includes a high water mark which means a fund manager can only start earning performance fees again, in a fund which has lost value, when it passes its previous highest value.

 

performance fees in the news

In November 2013, it was reported that JPMorgan had succumbed to fee pressure and decided to smooth performance fees over a three year period. The move followed increased pressure from pension funds who are themselves under pressure to deliver lower cost investments to their members.

It also followed the news in June 2013 that the European parliament had narrowly voted down proposals to fine fund managers who charge performance fees even when they are below par.