I understand the sales angle. “You buy into our fund and if we perform then we win along with you. It’s what we call a win-win.” It seems a perfectly reasonable way of investing. It can also appeal to our sense of fairness.
It is crass.
I carried out some research for a client on a fund only to find it was subject to a performance fee. The last time it was paid was in 2018! So what do we learn?
If you allocate your capital to funds that have performance fees, are you paying them now? Part of the good news is that if you are paying them, then they must be outperforming. Right? In fact, you need to define what they mean by performing. Essentially they are performing against a specific benchmark. So you need to check the benchmark to decipher whether your success is fair and reasonable?
You also need to compare against other risk-adjusted benchmarks to put the performance into context.
And what happens if performance fees have been paid but then performance slides? Do you get a refund? Probably not.
So many investors sadly fail to understand if they have funds that employ performance fees. Unless you ask good questions, someone else is probably making more on your money than you are!