By Steinar Eikeland, chief investment officer at Industrifinans Kapitalforvaltning, an asset management firm based in Oslo, Norway.
Overall, investment management clients and regulators are demanding more transparency and standardization across the industry, and this includes the calculation of performance fees.
Financial Technologies Forum is again facilitating a meeting place for the industry to discuss this dynamic development in the field of performance measurement via the upcoming conference Performance Measurement Europe 2017. This year, the calculation of performance fees is taking the spotlight.
Comprehensive standardization has already taken place in the investment management industry.
First, fund structures have converged, especially through European regulation like Undertakings for the Collective Investment of Transferable Securities (UCITS) and Alternative Investment Funds (AIFs).
Second, trading activities within each fund have been under scrutiny through the regulation of best results and through the demand for greater transparency of brokerage fees.
Finally, the calculation of fund returns has matured with the investment management industry’s adoption of Global Investment Performance Standards (GIPS).
The next standardization challenge for the investment management industry is fees.
Management fees, based on assets under management for each fund, are quite straightforward. On the other hand, performance fees in all their complexity and numerous variants do not contribute to a common ground for competition. A standard, transparent framework for performance fees is crucial in order to allow a meaningful ex-ante peer group analysis of funds charging this fee. Such a framework with predefined parameters will empower industry participants to communicate clearly their performance fee structure to their clients.
In fact, there are two recent articles that address how fairness and transparency in setting performance fees can be achieved, and furthermore how to keep a reasonable flexibility in the calibration of them. The articles, “Fair and Transparent Performance Fee — Part One,” and “Fair and Transparent Performance Fee — Part Two,” were recently published in The Journal of Performance Measurement.
The published articles do not form a guideline for performance fees, but are rather a review of academic literature on the topic and serve as a recommendation for a common framework for calculations and parameter definitions.
It is time for the investment management industry and securities markets regulators to develop a guideline for fair and transparent performance fee.
To meet Steinar Eikeland and learn more about this subject, please attend FTF’s Performance Measurement Europe conference, September 26, in London.
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