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Performance Fee
Definition
Also known as an incentive fee, these are paid to a manager as a percentage of profits, normally above a certain preferred return to investors or a hurdle rate.
Using the term Performance Fee :
Performance fees can range in the 10 to 20% range of profits. They are usually only payable to a manager after they have achieved a certain level of profitability, known as a hurdle rate. Hurdle rates are often near the return of a treasury, but can be as high as 7-8%.
Pay Special Attention To :
Performance fees are great tools for investors to incentivize their managers. However, they can also cause the manager to take too much risk to try to get these fees. Therefore, you must monitor your managers carefully to ensure that they are taking the appropriate level of risk that you desire. If so, a performance fee is a great way to align your interests with those of the manager.
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Related terms
Ad Valorem Fees
