The Costs and Benefits of Performance Fees in Mutual Funds

63 Pages Posted: 9 Oct 2018 Last revised: 10 Dec 2020

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: December 1, 2020

Abstract

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

Servaes, Henri and Sigurdsson, Kari, The Costs and Benefits of Performance Fees in Mutual Funds (December 1, 2020). 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 )

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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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