Financial Education

Investment managers are typically paid fees on an ad valorem (percentage of assets) basis, a performance-based basis, or a combination of the two.

Ad valorem fees are typically based on the amount of assets being managed, with higher allocations resulting in lower fees as a percentage of assets. This is because many of the costs associated with active management are of a fixed nature. Ad valorem fees have the advantages of simplicity and predictability for both investors and managers.

Performance fees usually awarded when the manager’s performance exceeds that of a predetermined benchmark, and are awarded based on a percentage of the outperformance. Sometimes the performance fee is capped, and often investors require a high water mark provision, which requires the manager to generate cumulative outperformance since the previous performance fee was paid. Performance fees typically have complicated structures, but benefit the manager and investor in the same way.

For more information, see all articles on: Active Management, FInancial Planning, Investing in Stocks, Investment Returns, Portfolio Management

See also:

Alternative Routes to Hedge Fund Return Replication

Required Disclosures Under Global Investment Performance Standards (GIPS)

The Structure of Hedge Funds

The Efficient Market Hypothesis and Index Funds

Sentiment Indicators