Performance Fee

Performance Fee is commonly used in mutual funds, hedge funds, and portfolio management services (PMS). It aligns the interests of the fund manager with investors, as the manager earns more only when returns exceed a certain level.

In India, such fee structures are regulated by the Securities and Exchange Board of India.

How Performance Fee Works

• Charged only when returns exceed a benchmark or hurdle rate
• Often includes a high-water mark (no fee on recovered losses)

Common Structure

👉 Example: “20% of profits above 10% return”

Key Features

• Incentive-based fee
• Linked to fund performance
• Encourages active management

Why Performance Fee Matters

• Aligns investor and manager interests
• Rewards outperformance
• Impacts overall returns

Risks & Considerations

• May encourage excessive risk-taking
• Reduces net returns for investors
• Complex fee structures

"If a fund earns 15% return with a 10% hurdle rate and 20% performance fee: 👉 Fee applies only on extra 5% return"