Know what performance fees you’re signing up for

Performance fees and their timing can have a bigger impact on returns than you might think

Man Managing Finances with Cash and Calculator
(Image credit: Getty Images)

Costs and fees are usually the biggest drag on investment performance over the long term. The higher the costs, the higher the return required for investors to make money. According to one study, only 17% of actively managed funds have outperformed their benchmarks over the past decade. This suggests that most managers are not worth the fees they charge. But that hasn’t stopped managers from charging over the odds for their services.

One trick is the annual performance fee. The idea of an annual performance fee makes sense when taken at face value. If a fund manager can outperform their fund’s benchmark, they deserve compensation for the effort.

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Rupert Hargreaves
Contributor and former deputy digital editor of MoneyWeek

Rupert is the former deputy digital editor of MoneyWeek. He's an active investor and has always been fascinated by the world of business and investing. His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.

Rupert has written for many UK and international publications including the Motley Fool, Gurufocus and ValueWalk, aimed at a range of readers; from the first timers to experienced high-net-worth individuals. Rupert has also founded and managed several businesses, including the New York-based hedge fund newsletter, Hidden Value Stocks. He has written over 20 ebooks and appeared as an expert commentator on the BBC World Service.