What is a performance fee?

Performance fee may generally refer to a fee charged for the performance of some type of service. Usually, however, it is a term used in the financial industry and can also be referred to as an incentive fee. This is because the performance fee is a type of compensation based on motivation. Depending on their service agreement, investment managers may collect a performance fee or percentage of profits that will realize on the investment for the client. The structure of performance fees varies and not all investment managers are set to accept them. Some managers receive a regular salary for their work and have no form of compensation based on motivation. Others receive compensation through performance fees - percentage of fund profit to motivate wise investments as well as management fees - percentage of the value of the Fund for the compensation of managers and expertise in the field of fund management. First, the rate of performance fee, usually a percentage of profits, may vary. E.gFor example, fees for the performance of mutual funds usually range from less than 1%to 5%, but can go up to 15%. On the other hand, the fees for the performance of the hedge fund can go up to 40% or more.

The timing of the payment of performance fees may vary among investment managers. Fees can be paid annually, although most managers take their fees quarterly or monthly. Some compensation structures that include fees for performance -based, not just profits may include high water stamps. This means that the performance fee will only be issued to increase the value of the investment compared to the previous largest value. In these cases, Evan If the investment has made a profit, if this new value is below some previous net value, the manager will not receive a performance fee.

There are many discussions on whether the structures of the performance fees are fair or useful. Supporters saythat sharing the risk of investment helps to encourage managers to actively seek an improved return on investment because they get a reduction in these profits. Critics, on the other hand, claim that performance fees can actually motivate managers to undergo disproportionate risks in the hope of changing a lot of profit. These risks can not only affect the investor, but if they are made on a large scale, they can affect whole markets. As a result, these critics propose a thorough control, not if government regulation if the performance fees are allowed.