What is performance fees and management fees

Question

Accepted Answer

Performance fees are fees charged by investment managers based on the performance of the investment, while management fees are fixed fees charged for managing the investment.

Performance fees are typically a percentage of the investment gains, and are only charged if the investment performs well.
Management fees are charged regardless of the investment performance, and are typically a percentage of the total assets under management.
Performance fees are meant to incentivize investment managers to perform well, while management fees cover the costs of managing the investment.
For example, a hedge fund may charge a 2% management fee and a 20% performance fee.
Performance fees can be controversial as they can incentivize investment managers to take on excessive risk in order to generate higher returns.

Accepted Answer

Management fees

Management fees are fees paid to the investment Manager for managing the fund.
This is fees paid for having the fund professionally managed and are paid regardless of the fund's performance.
This is generally 2% of AUM as per the 2 and 20 structure where 2% is the Management fees and 20% is the Performance fees.

Performance Fees

Performance fees are paid in addition to the Management fees for the positive return on fund.
There is a hurdle rate where performance fees is paid only if the hurdle rate is crossed or else the Investment Manager is not eligible for the payment of performance fees.
This is generally 20% of profit (soft hurdle Rate) or 20% of profit in excess of the benchmark (Hard hurdle rate) depending on the agreement.

What is performance fees and management fees

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