The Costs and Benefits of Performance Fees in Mutual Funds

62 Pages Posted: 9 Oct 2018 Last revised: 1 Aug 2019

See all articles by Henri Servaes

Henri Servaes

London Business School; Centre for Economic Policy Research (CEPR)

Kari Sigurdsson

Schroders Investment Management

Multiple version iconThere are 2 versions of this paper

Date Written: July 16, 2019

Abstract

Funds with performance fees have annual 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 investors should pay particular attention to the benchmarks employed to compute whether performance fees are paid.

Keywords: performance fees in mutual funds, fund returns, value added, fund expenses, risk-taking incentives

JEL Classification: G23

Suggested Citation

Servaes, Henri and Sigurdsson, Kari, The Costs and Benefits of Performance Fees in Mutual Funds (July 16, 2019). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 588/2018. Available at SSRN: https://ssrn.com/abstract=3250315 or http://dx.doi.org/10.2139/ssrn.3250315

Henri Servaes (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
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+44 20 7000 8268 (Phone)
+44 20 7000 8201 (Fax)

HOME PAGE: http://faculty.london.edu/hservaes/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Kari Sigurdsson

Schroders Investment Management ( email )

31 Gresham Street
London, EC2V 7QA
United Kingdom

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