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Performance Fees - Risk and Remedies

The key problem with asymmetric performance fees (the most common type of performance fee used by investment funds) is that they also carry an incentive to increase risk. The white paper below explains and quantifies how six remedies can be used to suppress the performance fee's undesirable risk-maximizing incentive while not diminishing its desirable return-maximizing incentive.

Supplementary Documentation

The three white papers that are listed below contains additional documentation for the arguments regarding the risk of using performance fees described above in Alpha Captech’s white paper on performance fees. Specifically, it shows the distribution of return and risk to respectively investors and performance fee receivers for four different fund and fee situations and they are 1) use of leverage or not, 2) use of long-term or short-term performance fees, 3) use of alpha neutral or alpha negative hurdle rates, and 4) use of highly correlated or non-correlated hurdle rates.


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