Performance fee

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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 in addition to its management fee.

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.^[1] 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 (before the investor) 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 (or "NAV"), which represents the value of the fund's investments. Performance fees are widely used by the investment managers of hedge funds, which typically charge a performance fee of 20% of the increase in the NAV of the fund in addition to the base management fee.^[2]

In the United States, performance fees charged by registered investment advisers are subject to certain requirements under the Investment Advisers Act of 1940.^[3] In addition, performance fees may be charged to registered investment companies only under certain conditions.^[4] Finally, performance fees charged to pension plans governed by the Employee Retirement Income Security Act (ERISA) must also meet certain requirements.^[5]