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Discussion Paper Details

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Title: The costs and benefits of performance fees in mutual funds

Author(s): Henri Servaes and Kari Sigurdsson

Publication Date: December 2018

Keyword(s): fund expenses, fund returns, performance fees in mutual funds, risk-taking incentives and value added

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Servaes, H and Sigurdsson, K. 2018. 'The costs and benefits of performance fees in mutual funds'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13399