Performance Fees

A performance fee is a fee that is typically charged monthly to the investor. This fee is charged from the new net equity high, also known as a high watermark. Typical performance fees are between 20-25%, however on some more aggressive models fees go as high as 60% of net new profits. On funds of funds fees can be as low as 10%.

The way this works is as follows. Let’s say the investor deposits $100,000 into the account and you charge them a 20% performance fee. If you make 10% on the account during the course of the month, you as the manager will receive $2,000 or 20% of net new profits. After the first month there is $110,000 in the account. Let’s assume you lose $50,000 the next month to bring the account value down to $60,000. Because you lost money in the account you make nothing that month. You will continue to make nothing until you bring the account back over the high watermark of $110,000 which is the peak.

This has an advantage for the investor because you don’t get paid unless you make money. However there is also a conflict of interest with the investor because, you as the trader may be inspired to get too aggressive because you will want a high performance fee, and thus unreasonably high profits, thereby risking more of the account than appropriate.