3704570: After-Work Lecture: Performance-based Fees in Asset Management: Some Critical Observations

Beschreibung

Performance-based fee arrangements are becoming increasingly popular in the investment management industry. The advantage of performance fees is that, from the investor’s viewpoint, they are the fairest way of compensating asset managers and motivate them to achieve the best possible performance. One of the disadvantages of performance fees is that, because they are return-based, they may motivate asset managers to incur higher investment risks. In addition, performance fees often involve complex and ambiguous calculation methods leading to numerous practical issues that cause misunderstandings among investment managers, fund administrators and investors. Besides, the regulatory guidelines and industry self-regulation that exist in this area are high-level and do not provide sufficient methodological guidance. Therefore, performance fee models and their specific parameters should be clearly stipulated in the fund prospectus and investment management agreement, and all parties should agree to a single definition of performance - is it return or is it a combination of return and risk?
We will discuss how complexity of performance fee models and lack of detail in investment management agreements may lead to disputes and financial costs both for asset managers and investors and why a performance fee arrangement should account for the three key elements: fairness toward investors, positive incentives for portfolio managers, and practicability in administration. In addition, we will discuss why the investment industry would benefit greatly from a better guidance for performance fee models.