What are performance fees in asset management?

Performance fees in asset management are compensation structures that reward fund managers based on the profits they generate for their investors. This aligns the interests of the fund manager with those of the investors, as the manager only receives a performance fee when the fund meets or exceeds certain predefined benchmarks or targets. Such fees typically come in addition to a base management fee, creating an incentive for managers to achieve high returns.

This fee structure can vary, but it often includes a percentage of the profits made above a specified threshold, which can encourage risk-taking behavior in pursuit of higher returns. Overall, performance fees are designed to align the compensation of the asset manager with the financial success experienced by the investors.