More mutual funds embrace performance fees

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Performance fees are not necessarily novel in the mutual fund industry. Fidelity and Vanguard have long used them, though you could argue about the success at both firms. But interest is now growing among other mutual fund firms, notes the Financial Times.

"In October 2010, 3.7 percent of the nation's 5,728 mutual funds used such fees, up from about 3 percent in 2007, according to Lipper. In 2009, Putnam Investments added performance fees to 18 funds, and last year Janus Capital Group nearly doubled its portfolio of performance-fee funds, from 12 to 20."

Do these fees make a difference? According to a 2003 study in the Journal of Finance, funds with such fees slightly outperformed those that pay a flat fee, and they carry lower expense ratios. But they are riskier and stray more often from stated investment objectives.

These fees are nothing like the performance fees for hedge funds. The most interesting difference (apart from the sheer size) is the SEC requirement that if a fund is able to be paid for good performance, they must also be penalized to a similar extent for bad performance. That would be a revolutionary idea in the hedge fund world, and it would take a true visionary (perhaps a foolish one) to espouse such a system. But we may get one yet. It would be a remarkable story if hedge funds embraced this en masse.

For more:
- here's the article

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