Fee payable to the fund manager for the returns achieved by the fund. The fee is calculated, either during the life of the fund or at the termination of the fund, as a percentage of the fund's performance over a designated hurdle rate or benchmark.
There are a number of different methods of calculating performance fees:
1) On the overall return over the entire life of the fund, i.e. since inception
2) On a rolling basis whereby the performance fee for the period (i.e. annual) is based on the performance over a longer period of time, i.e. 3 years; or
3) On the performance for the period in which the performance fee is being paid.
Performance fees can be paid to the fund manager either from income returns or from capital.
Note: some agreements can pay performance fees even when returns are negative.