Are performance fees worth it for investors?

Performance fees often align manager incentives with investors, but they can also inflate costs. The article explains that while they may create 'skin in the game' for managers, losses and performance fees don’t mix, making them riskier for investors. Whether they’re worth it depends on balancing alignment vs. cost impact.

Should investors care about profit shares or just post-fee returns?

The article argues investors should focus on post-fee returns rather than profit shares. It highlights that profit shares don’t directly reflect net returns, and the emphasis should be on how fee structures affect long-term outcomes, not just the share of profits.

How do hurdle rates affect performance fees?

Hurdle rates set a minimum return threshold for managers before performance fees apply. As explained in the article, if a fund doesn’t meet the hurdle rate, performance fees don’t kick in, which can protect investors from paying fees during underperformance.

Why do fund managers charge performance fees?

Performance fees are charged to align managers’ incentives with investors, but the article questions if they’re just another way to charge more. It notes that these fees can create 'skin in the game' for managers, though the article also highlights murky areas like hidden fees complicating this alignment.

[Podcast] Profit Shares & Performance Fees: Are They Really Worth It?

6 Feb 2025CM Team3 min read

Quick Facts

Are performance fees worth it for investors?: Performance fees often align manager incentives with investors, but they can also inflate costs. The article explains that while they may create 'skin in the game' for managers, losses and performance fees don’t mix, making them riskier for investors. Whether they’re worth it depends on balancing alignment vs. cost impact.
Should investors care about profit shares or just post-fee returns?: The article argues investors should focus on post-fee returns rather than profit shares. It highlights that profit shares don’t directly reflect net returns, and the emphasis should be on how fee structures affect long-term outcomes, not just the share of profits.
How do hurdle rates affect performance fees?: Hurdle rates set a minimum return threshold for managers before performance fees apply. As explained in the article, if a fund doesn’t meet the hurdle rate, performance fees don’t kick in, which can protect investors from paying fees during underperformance.
Why do fund managers charge performance fees?: Performance fees are charged to align managers’ incentives with investors, but the article questions if they’re just another way to charge more. It notes that these fees can create 'skin in the game' for managers, though the article also highlights murky areas like hidden fees complicating this alignment.

In today’s episode, we break down profit shares and performance fees, one of the most debated topics in the asset management industry. Are they a fair way to align incentives, or just another way for fund managers to charge more?

We get into the nitty-gritty of who can charge performance fees in India and how it works, the meaning of terms like management fee, hurdle rate, catch-up, and high watermark, and whether performance fees actually create skin in the game for fund managers. We also discuss why losses and performance fees don’t go well together, whether investors should care about profit shares or just post-fee returns, and whether paying a performance fee is ever worth it.

We also explore some of the murky areas of the industry, including hidden fees, commission structures, and the psychology behind why investors accept certain charges without question.

At Capitalmind PMS, we don’t charge a performance fee, and we explain why we chose this model. If you’ve ever wondered how fee structures impact your long-term returns, this episode is a must-listen.

00:00 Introduction and Disclaimer

00:42 Overview of Performance Fees

02:35 Understanding Management Fees

05:32 Performance Fees and Hurdle Rates

07:34 Catch Up and High Watermark Concepts

11:04 Complexities in Fee Structures

14:31 Skin in the Game and Incentives

29:34 Management Fee Only Model

31:17 Incentives and Performance in Fund Management

32:43 Principles of Charging Profit Share

33:14 Small Funds and Profit Share Justification

34:41 Mutual Funds and Profit Share Dilemma

35:49 Historical Examples and Active Management

37:37 Challenges in Asset Management

45:20 Regulatory Perspectives on Fees

51:09 Evaluating Investment Options

56:52 Final Thoughts on Profit Shares