The Costs and Benefits of Performance Fees in Mutual Funds
63 Pages Posted: 9 Oct 2018 Last revised: 10 Dec 2020
Date Written: December 1, 2020
Funds with performance fees have annual net risk-adjusted returns of 0.50% below other funds, a result mostly due to funds without a stochastic benchmark against which performance is measured and funds with a benchmark that is easy to beat. This is not due to unobservable differences in fund manager quality. Performance fee funds charge total expenses, including the performance fee, that are substantially higher than those of other funds. They are not more volatile than other funds, however. Our results indicate that performance fees are often employed to extract extra fees from investors, who should pay particular attention to the benchmarks employed to compute whether performance fees are paid.
Keywords: performance fees in mutual funds, fund returns, fund expenses, risk-taking incentives, fund flows
JEL Classification: G23
Suggested Citation: Suggested Citation