Funds & wrappers
Performance fee
An additional charge taken as a share of returns above an agreed threshold.
How it works
The classic hedge fund arrangement charges a management fee plus a share of profits above a hurdle, subject to a high-water mark that prevents charging twice for the same gains.
The structure is asymmetric by design: the manager shares the upside and not the downside.
Where it misleads people
A performance fee without a hurdle rate charges for returns the market delivered. One without a high-water mark can charge repeatedly for recovering losses it already charged for.
Related terms
- High-water markThe highest value a fund has reached, above which performance fees can be charged again.
- Expense ratioThe annual percentage of your money a fund takes to cover its running costs.
- Hedge fundA lightly regulated private fund able to use leverage, shorting and derivatives freely.
- BenchmarkThe index or reference portfolio you measure yourself against, to see whether your decisions added anything.
More in Funds & wrappers
- Portfolio turnover
- Net asset value
- Premium and discount
- Mutual fund
- Private equity
- Leveraged ETF
- Synthetic ETF
- Investment trust
All 25 Funds & wrappers terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.