Performance fees are payments made to an investment adviser based on how well a client’s portfolio performs. These fees are often calculated as a percentage of the investment profits. A common example is carried interest — a type of performance fee typically earned by private equity and venture capital fund managers, where they receive a portion of the fund’s profits.
Private equity funds often follow a “2 and 20” fee structure, meaning a 2% annual management fee (based on assets under management) and a 20% performance fee (based on profits above a set benchmark). Performance fee structures like this are designed to align the interests of the fund manager and investors.
Registered investment advisers should also consult Section 205(a) of the Investment Advisers Act for detailed rules about performance-based fees. If you’re wondering what are performance fees or how carried interest works, understanding these terms is key when evaluating fund manager compensation.
Building Blocks: Private Funds | Building Blocks: Starting a Private Fund | Investment Advisers Act Section 205(a)
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