Are performance fees a panacea or Pandora’s box? Research from Lipper, a Thomson Reuters company, provides new insights on this topic.

By analysing both hedge funds and mutual funds in the UK (OEICs and unit trusts), the report has relevance for the wider European industry.

Report highlights

· Lipper unveils its 10-point list of fee standards for hedge funds, which can be used as guidelines for disclosing fees and expenses by fund companies, as well as a ‘checklist’ for investors’ due diligence.

· Among hedge funds where Lipper has calculated Total Expense Ratios, the asset-weighted average is 1.82% and the mean is 2.48% — before the impact of performance fees, which can often double the level of operating expenses incurred. Clearer disclosure of such costs would certainly help investors

· Lipper has identified 81 open-ended funds in the UK with performance fees in place, a rise of 138% from the 34 funds identified at the end of 2007 — still less than 5% of the industry’s total number of funds.

· Two thirds of UK funds (66%) can charge a performance fee if the fund out-performs a falling index. Also, among those funds that must beat an index to earn a performance fee, fewer than a quarter (22%) use a cash-like index (such as Libor), indicating that far more funds than just those seeking absolute returns use performance fees

Ed Moisson, author of the report, commented “Three themes emerge in the report: the need for companies to demonstrate they are aligning their interests with those of investors, the clarity and range of information for investors, and the onus on fund companies to take on a fiduciary responsibility in relation to fees.”