Performance fees on the up

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Fund managers are set to increase their use of performance fees and to reduce management fees this year, according to research from Skandia Investment Group.

Nearly two-thirds of global fund managers, with a combined $7,000bn (£4,190bn, €4,800bn) assets under management, expect to see greater use of performance fees, while three-quarters expect traditional management charges to fall in the next few months.

The trend comes at a time when “the asset management industry understands it needs to align itself better with investors’ interests than it has in the past. One way active fund managers can do this is through the use of performance-related fees,” said Nils Bolmstrand, Skandia’s newly arrived chief executive.

“Some investors want a fixed fee of 1 to 1.5 per cent but others believe if returns are not good then this fee is not merited,” he added.

Although there has been much debate about the use of performance fees in the asset management industry in recent years, the practice has yet to take off outside the hedge fund industry.

Mr Bolmstrand said a move by many of these hedge fund operators into the retail space had been a trigger for change. He said annual management fees could fall by up to 50 basis points, while performance fees were likely to be less than the 20 per cent often charged by hedge fund managers.

GLG Partners, an alternative asset manager that acquired Société Générale’s UK long-only asset management business, earlier this year, already uses a performance fee for its long-only UK Select equity fund, launched last month.

A fee of 20 per cent is levied on returns above a benchmark with an annual management charge of 1 per cent.

Andrew Thatcher, joint head of the UK retail business, said: “We’re excited to be part of the debate of moving away from fixed fees but it will not be a blanket approach for all our funds. We will only use a performance fee if we are confident a fund will significantly outperform its benchmark,” he added.

Germany has already seen a rise in mutual funds using performance-related fees.

“There were less than 5 per cent at the beginning of the decade and now on the equity side about 15-20 per cent,” said Ed Moisson, head of consulting at Lipper FMI.

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