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Clawback proposed on performance fee deals

Groups using performance fees should include a clawback feature to reduce charges if the manager fails to achieve targeted returns, Lipper has proposed.

Research by the firm suggests such a move would help to ensure a fund’s charging structure is more than just a one-way bet for the company.

Overall, Lipper found two-thirds of the 81 open-ended funds in the UK that use performance fees can levy the charge for beating a falling index.

This means the group can take fees even if investors are losing money.

Lipper FMI head of consulting Ed Moisson says only a minority of groups using performance fees levy less than the standard 1.5% annual management charge. “The vast majority charge 1.5 per cent or more, suggesting there
is, in principle, no financial downside for companies implementing a performance fee structure,” he adds.

The research coincides with a rising debate on performance fees, with Peter Hargreaves, a -co-founder of Hargreaves Lansdown, saying fewer than a dozen managers in the UK warrant them.

Lipper’s research shows the number of funds charging performance fees increased from 34 at the end of 2007 to 81. But this still represents less than 5 per cent of the industry’s total number of funds.

“Fund firms should demonstrate they are doing more than just assuming a performance fee intrinsically aligns the interests of a manager and their investors,” says Moisson.

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Comments

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  1. Caveat Emptor. I wouldn’t recommend a fund which levied performance fees. The AMC should be quite enough and, in many cases, some would argue that it’s already more than enough.

    Though it’ll probably never happen because no one country would dare to do it unilaterally, I’d like to see all short selling banned. That would bring a vastly greater degree of stability to investment markets and save investors a ton of money on unnecessary trades that make no one any money but the traders themselves. But that’s just MHO.

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