Performance Fees

RayWolfe

I refuse to buy investment products with a performance fee. Am I wrong?

I notice Merryn Somerset Webb was having a toot about this in various media over the weekend in connection with Anthony Bolton’s new China IT and I’ve just read the following in an article the FT:

“Performance fees are introduced solely for the benefit of the investment company and to the detriment of the investor. There is absolutely no argument that performance fees align the interests of the fund manager and the investor.”

What I have also seen, is that it seems almost impossible to find a new fund launch that doesn’t have a performance fee.

Apart from the obvious – the greed of investment managers – why has this happened and what can we do about it? I believe it started with hedge funds which are predominantly sold to professionals, so why do they think it’s OK for retail funds? What are the benefits to us, the buyers? Do funds with performance fees outperform funds without?

So many questions! But I’m still refusing to play their game ..... maybe that’s why I’m still poor.

JamesU

I would question the use of the wording performance fee. It implies you pay for performance and do not pay if there is no performance. Am I missing something here?

JamesU

turbobob

JamesU wrote: »

I would question the use of the wording performance fee. It implies you pay for performance and do not pay if there is no performance. Am I missing something here?

JamesU

That's right. However they are normally charged in addition to other management charges. So you could for example pay 1.5% AMC (irrespective of performance) + 20% of growth.

StevieJ

RayWolfe wrote: »

I
So many questions! But I’m still refusing to play their game ..... maybe that’s why I’m still poor.

Even worse when linked to Libor what is it not much above BR 0.5% I reckon :eek: So the fee comes into play with virtually no performance.

purch

Yes.

A performance fee might be a reasonable idea, if it's paid out for a significant overperformance.

Paying out a fee, for exceeding a benchmark you could easily match with a low cost tracker is not a worthwhile concept IMHO.

Lokolo

Does it mean we should get a performance refund if performance is bad?

StevieJ

Lokolo wrote: »

Does it mean we should get a performance refund if performance is bad?

Maybe but you won't.

princeofpounds

It isn't a case of right or wrong - as long as the fees are disclosed and you are happy with the structure then it's all ok. There isn't a question of ethics here, although there might be one of principal-agent misalignment.

Frankly I think the commentary above is quite wrong - performance fees can help better align the interests of manager and investor, but only if appropriate and well-designed.

You don't need to look at a new fund. There are plenty of perfectly good funds out there that charge management fees only.

Apart from the obvious – the greed of investment managers – why has this happened and what can we do about it? I believe it started with hedge funds which are predominantly sold to professionals, so why do they think it’s OK for retail funds?

Why would it not be ok? as long as it is sold fairly it is not beyond the comprehension of any numerically-literate person.

What are the benefits to us, the buyers?

In theory intermittent performance fees might permit a lower management fee charge, therefore meaning that fees are slightly lower if the product fails and slightly higher if it suceeds than a flat fee structure. This is incentivisation.

Do funds with performance fees outperform funds without?

I haven't looked at the research, but my intuition would be that there may be some slight positive effect but that the amount of the extra fee overwhelms it. That's certainly the case with active management compared to passive.

So many questions! But I’m still refusing to play their game ..... maybe that’s why I’m still poor.

I doubt it.

StevieJ

princeofpounds wrote: »

It isn't a case of right or wrong - as long as the fees are disclosed and you are happy with the structure then it's all ok. There isn't a question of ethics here, although there might be one of principal-agent misalignment.

Frankly I think the commentary above is quite wrong - performance fees can help better align the interests of manager and investor, but only if appropriate and well-designed.

You don't need to look at a new fund. There are plenty of perfectly good funds out there that charge management fees only.

I am looking for an absolute return fund without one, any ideas?

princeofpounds

I am looking for an absoloute return fund without one, any ideas?

You are very unlikely to get an absolute return fund without a performance fee.

This is because an absolute return fund is actually a very different beast to a normal fund. Alpha (the sort of returns you hope get from these funds) is much mor expensive than Beta (which are the sort of returns that dominate most mutual fund investments).

I wouldn't suggest anyone gets an absolute return fund unless they have a very large amount of money to diversify. The main benefits of absolute return strategies are not the actual returns themselves (which are often unspectacular) but the fact that they are very uncorrelated to general markets and so diversifying into them provides a better risk/reward balance (NOT a better reward). An individual is unlikely to notice or properly allocate their assets to gain such a benefit.

Rollinghome

It's the absurdly low hurdles that generally makes them a nonsense.

The hurdle for the Blackrock Absolute Alpha fund is just 3mth LIBOR which is currently just 0.25%. The fund has returned only 1% in total over the last 6 months compared with a rise in the FTSE over the same period of 15% and yet on top of the usual 1.5% AMC could qualify for a 20% "performance fee" for returning more than 0.25%.

Investors in the UK pay around twice as much for fund management as in the US and performance fees are another way to push fees even higher. They're able to do it because lack of sensitivity to price and how it effects performance by investors and because commission-based advisers won't sell low cost funds that pay them less commission.