A Comparative Analysis of Performance Fees

Posted: 9 Jan 2018

See all articles by Megan Czasonis

Megan Czasonis

State Street Corporate

Mark Kritzman

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Baykan Pamir

State Street Associates

David Turkington

State Street Associates

Date Written: January 2, 2018

Abstract

Many investors pay their investment managers fees that include a base component, which is a fixed percentage amount of the fund’s assets, and a performance component, which is a variable amount that is contingent on the performance of the fund. These fee arrangements are typically referred to as performance fees, while fee arrangements that do not include a variable component are referred to as flat fees. In this paper we provide a comprehensive, ex ante comparative analysis of returns net of fees taking into account a wide range of features about the structure of the fees, the performance of the managers, and the preferences of the investor. Because the interaction of these features are complex and often subtle, we cannot adequately evaluate after-fee performance based simply on the mean and dispersion of the after-fee return nor the implied option value of the fee. Instead, we employ simulation to produce ex ante distributions of after-fee performance, and we use the certainty equivalents of these distributions to compare alternative fee arrangements.

Keywords: Certainty equivalent, Flat fee, Kinked utility, Log utility, Performance Fee, Power utility

JEL Classification: C10, C40, C60, G11

Suggested Citation

Czasonis, Megan and Kritzman, Mark and Pamir, Baykan and Turkington, David, A Comparative Analysis of Performance Fees (January 2, 2018). MIT Sloan Research Paper No. 5260-18. Available at SSRN: https://ssrn.com/abstract=3098395 or http://dx.doi.org/10.2139/ssrn.3098395

Megan Czasonis

State Street Corporate ( email )

1 Lincoln Street
Boston, MA 02111
United States

Mark Kritzman (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Baykan Pamir

State Street Associates ( email )

140 Mt. Auburn St.
Cambridge, MA 02138
United States

David Turkington

State Street Associates ( email )

United States

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