Independent fund research company Fitz Partners gives an insight into the calculations of funds’ performance fees and their choice of benchmarks in the latest edition of its Performance Fee Benchmarking Report and Database.
Hugues Gillibert (pictured), chief executive officer of Fitz Partners, says: “In light of growing discussions on how asset managers should be charging for ‘value’ and the alignment of investors and fund managers’ interests through the possible development of performance related fees, a deep understanding of performance fee structures is critical. Our latest Performance Fee Benchmarking report and database, offers the means to easily compare and analyse different performance fee structures currently in place in the fund industry.”
Fitz Partners estimates that 14 per cent of European cross-border funds charge a performance related fee. But performance fees are not all the same, and their structures vary significantly and result in very different levels of costs to investors. The choice of benchmark, definition of high water marks or level of hurdles have a significant impact on the actual performance fee charged to investors.
Gillibert adds: “We analysed and compared over a thousand different performance fee structures. For these 1,020 funds, the characteristics of the performance fee structures are listed, allowing their comparison: type of benchmark, presence of high water mark, hurdles, type of calculation, performance fee, crystallisations, claw-back, etc.”
According to Fitz Partners, 80 per cent of funds with performance fees use a benchmark in their fee calculations. Considering equity funds only, 90 per cent of them would measure their performance fee against a chosen benchmark, of which 6 per cent would use a straight “cash” related benchmark such as Libor or Euribor as a basis of their calculations without any extra hurdle.
The average performance fee charged on equity funds with a “cash” index in their fee structure is 9 per cent, when equity funds calculating their performance fees using an equity index charge on average 17 per cent of their out performance. Regarding equity funds not using any benchmark in their performance fee structure, they would have to exceed a hurdle of a minimum of 6 per cent or a high water mark or both, before starting charging a performance fee.
Gillibert says: “It is worth highlighting the average performance fee now charged through the main asset classes is around 16 per cent, a drop from the 20 per cent fee that was considered as the norm in the past.
“Performance fee rates are not the only factor that define the level of performance fees that would be charged to investors and looking at performance fee rates in isolation would be misleading. The rates of performance fees should always be compared alongside extra characteristics such as high water marks or hurdles for example.”