Performance fee

A share of the gain paid to a manager, often only above an agreed threshold. Also called an incentive fee or, in private funds, carried interest.

Example

A 20% performance fee on a 50,000 gain takes 10,000, and takes nothing in a year with no gain.

Important

A percentage of assets and a percentage of gain are not comparable until you assume a return, and which is cheaper flips between a good year and a bad one.

Related terms

• Management fee — A recurring charge for running an investment, usually quoted as a percentage of the assets held and taken every year regardless of the result.
• Carried interest — The share of a fund's profit that the manager keeps, conventionally around twenty percent, usually payable only above a defined return to investors.
• Hurdle rate — The return a fund must deliver to its investors before the manager becomes entitled to a share of the profit.

Lessons that explain it

• Fee drag: why a small percentage becomes a large number — A recurring fee is not a one-off cost. It is removed every year, and the money removed stops compounding - which is why the damage over a long hold is far larger than the fees themselves. (12 min)

All 578 terms in the Investing glossary