stors should be careful when investing in funds that rely on performance fees for income, as they may be paying more than they realise, according to a number of investment managers.

"When you look at a typical performance-based equity product, they are always excessively tilted in the interest of the manager rather then their client. You don't get an alignment of interest," MLC head of investment strategy Paul Duncan said.

Clients could also end up paying too much in fees when they invest money at different times during the year, because performance fees are generally calculated at the end of the year on the full amount in the account.

"While it's true that you could theoretically devise a performance-fee model that is equitable in terms of risk and reward, I've never seen one in 20 years," Duncan said.

Much effort went into understanding the individual fee structures, Forte Investment Advisors chief investment officer Ian Lundy, who analyses fund managers and their products for a number of consulting clients, said.

"Fees are a big factor in the research as a bad fee structure will wipe out any benefit from identifying a good manager," Lundy said.

"Too many so-called performance fees are just a money grab, particularly in the hedge fund world."

There had been cases where fund managers used benchmarks that had no relation to the investments in the portfolio, he said.

Some hedge funds and investment companies listed on the Australian Securities Exchange charge fees when they outperform cash benchmarks, such as the UBS Bank Bill Index, while the underlying portfolio invests in equities.

In that case, performance fees were paid on almost any upside in the market, Lundy said.

"What they call a performance fee is really a market appreciation fee," he said.


Performance fees can obscure costs
Performance fees can favour managers more than clients, according to investment advisers.
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