{"title":"On the Valuation of Performance Fees and Their Impact on Asset Managers’ Incentives","authors":"Wei Dai, R. C. Merton, Savina Rizova","doi":"10.2139/ssrn.3686987","DOIUrl":null,"url":null,"abstract":"This article provides a robust and practical framework for assessing performance fees. The fee valuation uses standard option pricing models and therefore does not require any expected return or alpha estimate. These features make the framework easy to use, robust, and widely applicable to a variety of fee structures in practice. The authors discuss the incentive impact of performance fees and caution against the unintended consequences for manager behaviors. These implications are especially relevant today, as systematic investing is on the rise and asset owners are increasingly interested in the adoption of performance fees across a broader range of investment styles. TOPICS: Derivatives, options, manager selection, performance measurement Key Findings ▪ This article provides a practical framework for assessing performance fees based on standard option pricing models. The fee valuation does not require any expected return or alpha estimate, making this framework transparent, robust, and widely applicable. ▪ Using the framework, the authors show the incentive impact of performance fees and caution against the unintended consequences for manager behaviors. ▪ The article discusses the implications of performance fees in the context of systematic investing. This discussion is especially relevant today as asset owners are increasingly interested in the broader adoption of performance fee structures beyond traditional alternative investments.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.4000,"publicationDate":"2020-09-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"1","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Alternative Investments","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.2139/ssrn.3686987","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q4","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 1
Abstract
This article provides a robust and practical framework for assessing performance fees. The fee valuation uses standard option pricing models and therefore does not require any expected return or alpha estimate. These features make the framework easy to use, robust, and widely applicable to a variety of fee structures in practice. The authors discuss the incentive impact of performance fees and caution against the unintended consequences for manager behaviors. These implications are especially relevant today, as systematic investing is on the rise and asset owners are increasingly interested in the adoption of performance fees across a broader range of investment styles. TOPICS: Derivatives, options, manager selection, performance measurement Key Findings ▪ This article provides a practical framework for assessing performance fees based on standard option pricing models. The fee valuation does not require any expected return or alpha estimate, making this framework transparent, robust, and widely applicable. ▪ Using the framework, the authors show the incentive impact of performance fees and caution against the unintended consequences for manager behaviors. ▪ The article discusses the implications of performance fees in the context of systematic investing. This discussion is especially relevant today as asset owners are increasingly interested in the broader adoption of performance fee structures beyond traditional alternative investments.
期刊介绍:
The Journal of Alternative Investments (JAI) provides you with cutting-edge research and expert analysis on managing investments in hedge funds, private equity, distressed debt, commodities and futures, energy, funds of funds, and other nontraditional assets. JAI is the official publication of the Chartered Alternative Investment Analyst Association (CAIA®). JAI provides you with challenging ideas and practical tools to: •Profit from the growth of hedge funds and alternatives •Determine the optimal mix of traditional and alternative investments •Measure and track portfolio performance •Manage your alternative investment portfolio with proven risk management practices