DP13399 The costs and benefits of performance fees in mutual funds

Author(s):	Henri Servaes, Kari Sigurdsson
Publication Date:	December 2018
Keyword(s):	fund expenses, fund returns, performance fees in mutual funds, risk-taking incentives, value added
JEL(s):	G23
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=13399

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.