Performance Fee

A performance fee rewards the manager for generating gains. In open-ended funds it is typically a percentage of net new profits per share or per investor over a period, accrued at each NAV and paid when it crystallizes, often annually. It is usually subject to a high-water mark and sometimes a hurdle rate. In partnerships it may be structured as an incentive allocation to the general partner rather than a fee.

Because investors enter and exit at different prices, a single fund-level fee can be unfair between them. Funds address this through equalization, series accounting or investor-level capital account calculations.

Pitfalls include accruing on gross rather than net-of-management-fee gains, mishandling crystallization on redemptions, applying the wrong high-water mark after transfers, and ignoring negative accruals when performance reverses. Fee calculations should be independently recomputed each period and tied back to the offering documents.

Example

A share class starts the year at $100.00 NAV per share with a high-water mark of $100.00. By year-end it reaches $110.00 before performance fees. The 20% fee is 20% × $10.00 = $2.00 per share, leaving a post-fee NAV of $108.00, which becomes the new high-water mark.