BROWSE

Incentive Fee

Definition

A performance fee is a fee that a client account or an investment fund may be charged by the investment manager that manages its assets. A performance fee may be calculated many ways. With respect to a separate account, it is often based on the change in net realized and unrealized gains, although in some cases, it can be based on other measures, such as net income generated. While not very common, some fund managers have attempted to link the performance fee to both upward and downward movement in a fund's gains, such as the shock absorber fee, where the fund manager gets penalised for adverse movement in the fund value. With respect to hedge funds and other investment funds, it is generally calculated by reference to the increase in the clientfund's net asset value, which represents the value of the fund's investments.

What is an 'Incentive Fee'

An incentive fee is a fee paid to a fund manager by investors. Incentive fees are typically dependent upon the manager's performance over a given period and are usually taken in relation to a benchmark index. For instance, a fund manager may receive an incentive fee if his or her fund outperforms the S&P 500 Index over a calendar year, and may increase as the level of outperformance grows.

Explaining 'Incentive Fee'

Incentive fees are usually in place to tie a manager's compensation to their level of performance, more specifically their level of financial return. However, such fees can sometime lead to increased levels of risk taking, as managers attempt to increase incentive levels through riskier ventures than outlined in a fund's prospectus.


Further Reading


Incentive fees and mutual funds
www.worldscientific.com [PDF]
… A second advantage of studying incentives for mutual funds is that these funds exist alongside mutual … This can be expressed as a never-negative incentive fee by stating the fee as a 60 … This means that fee rates are always convex over the lower range of performance and are …

Incentives and risk taking in hedge fundsIncentives and risk taking in hedge funds
www.sciencedirect.com [PDF]
… A second advantage of studying incentives for mutual funds is that these funds exist alongside mutual … This can be expressed as a never-negative incentive fee by stating the fee as a 60 … This means that fee rates are always convex over the lower range of performance and are …

The optimal dynamic investment policy for a fund manager compensated with an incentive feeThe optimal dynamic investment policy for a fund manager compensated with an incentive fee
papers.ssrn.com [PDF]
… A second advantage of studying incentives for mutual funds is that these funds exist alongside mutual … This can be expressed as a never-negative incentive fee by stating the fee as a 60 … This means that fee rates are always convex over the lower range of performance and are …

Incentive contracts in delegated portfolio managementIncentive contracts in delegated portfolio management
academic.oup.com [PDF]
… A second advantage of studying incentives for mutual funds is that these funds exist alongside mutual … This can be expressed as a never-negative incentive fee by stating the fee as a 60 … This means that fee rates are always convex over the lower range of performance and are …

Performance incentive fees: An agency theoretic approachPerformance incentive fees: An agency theoretic approach
www.jstor.org [PDF]
… A second advantage of studying incentives for mutual funds is that these funds exist alongside mutual … This can be expressed as a never-negative incentive fee by stating the fee as a 60 … This means that fee rates are always convex over the lower range of performance and are …

Role of managerial incentives and discretion in hedge fund performanceRole of managerial incentives and discretion in hedge fund performance
onlinelibrary.wiley.com [PDF]
… A second advantage of studying incentives for mutual funds is that these funds exist alongside mutual … This can be expressed as a never-negative incentive fee by stating the fee as a 60 … This means that fee rates are always convex over the lower range of performance and are …

Hedge fund incentive fees and the “free option”Hedge fund incentive fees and the “free option”
jai.pm-research.com [PDF]
… A second advantage of studying incentives for mutual funds is that these funds exist alongside mutual … This can be expressed as a never-negative incentive fee by stating the fee as a 60 … This means that fee rates are always convex over the lower range of performance and are …

Discretionary accounting accruals, managers' incentives, and audit feesDiscretionary accounting accruals, managers' incentives, and audit fees
onlinelibrary.wiley.com [PDF]
… A second advantage of studying incentives for mutual funds is that these funds exist alongside mutual … This can be expressed as a never-negative incentive fee by stating the fee as a 60 … This means that fee rates are always convex over the lower range of performance and are …

Incentives and financing methodsIncentives and financing methods
www.sciencedirect.com [PDF]
… A second advantage of studying incentives for mutual funds is that these funds exist alongside mutual … This can be expressed as a never-negative incentive fee by stating the fee as a 60 … This means that fee rates are always convex over the lower range of performance and are …

The economics of hedge fundsThe economics of hedge funds
www.sciencedirect.com [PDF]
… A second advantage of studying incentives for mutual funds is that these funds exist alongside mutual … This can be expressed as a never-negative incentive fee by stating the fee as a 60 … This means that fee rates are always convex over the lower range of performance and are …


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