Surprise: Pension Funds Like Performance Fees After All
| Feb 19th, 2007 | Filed under: Investment Management Fees | By: Alpha Male |
|
The hedge fund industry didn’t invent the performance fee. Clearly, performance-based pay has been around a long time. Large organizations have been dealing with the asymmetry, risk mis-alignment, and cultural resistance that come with performance-based compensation for years. So we thought it would be interesting to explore existing examples of performance fees to see what lessons might be gleaned.
In its February 5th issue, Pensions & Investments ran an editorial called “Performance Incentives” in which it argued for an increase in performance-based incentives for the heads of public pension funds. Interestingly, many of its arguments can be easily applied to the hedge fund world.
P&I argues that “exceptional pay is good for the fund…because it makes the pension promise more secure by raising funding levels”. The magazine even says the lack of performance-based compensation can lead to “inexperienced or untalented investment personnel (that) can actually raise a fund’s costs by producing poor investment returns.”
Performance-based pay also has its own effective hurdle rate. According to P&I, that hurdle should be implicitly set at “excess returns”:
To continue reading this article please login (at the right) or click here to learn more about accessing our archives.
Related Posts
- Long-only mutual funds with performance fees? You don’t see that every day…
- Annus horribilis for hedge funds illustrates benefits of performance-based fees
- Far from straightforward, performance fees revealed by study to be a dog’s breakfast
- Performance Fees: Paying the piper even when the band doesn’t show up
- Performance fees: As old as portfolio management itself?
