Are Performance Fees Right for Your Fund? A Case Study

Abstract

Alternative compensation arrangements for investment managers have long been a subject of debate among consultants and asset managers and their clients. Interest in the performance fee, which calls for a lower base fee plus a percentage of value added over the return of the benchmark to be paid to the manager, emerged in the 1980s. While institutional investors remain divided as to the relative merits of traditional and performance fees, here is a case study illustrating the source of the differences. The attractiveness of a PF arrangement depends primarily on the investor's performance expectations for the manager, the investor's view of its relationship with the manager, the investor's tolerance for periods of underperformance, and the terms of the PF arrangement itself.