The Costs and Benefits of Performance Fees in Mutual Funds
61 Pages Posted: 9 Oct 2018 Last revised: 20 Dec 2018
Date Written: December 6, 2018
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: Suggested Citation