Performance fees are another way of double-charging investors
There is no evidence that fund managers who charge fees for performing better are more skilful than those that don’t
Much of the debate about performance fees is premised on the idea that these fees align the interests of investors and managers. They don’t. Rather, they skew the investment rewards even more heavily in favour of fund managers. There is no evidence that fund managers who charge performance fees are more skilful than those who don’t. In that case, any outperformance will be down to the usual factors, most notably luck, and the particular market cycle favouring their chosen investment factor, rather than skill. Levying performance fees then merely allows them to charge a higher fee should they happen to beat their benchmark or hurdle rate. If performance fees did drive the manager’s effort, it would suggest fund managers who don’t charge them aren’t motivated to do their very best. But only the closet index trackers in the industry would subscribe to that. Other fund managers have a strong incentive to outperform, even without performance fees, as they stand to benefit from personal ...
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