Performance-Based Fees

September 2026

Asset-based fees, under which managers are compensated with a percentage of assets under management, have long been the dominant compensation structure used in the investment management industry.

An alternative approach links a portion of manager compensation to investment results. Performance-based fee arrangements may be found in both traditional and alternative asset classes. Adoption has historically been highest within alternative investments, where incentive-based compensation is often a core component of manager economics. These fee structures attempt to better align the economic interests of managers and institutional investors by creating a relationship between what investors pay and the performance they actually receive.

This paper examines performance-based fee arrangements, with a focus on how they relate to traditional long-only investment managers. It reviews the strengths and weaknesses of both asset-based and performance-based compensation structures, discusses common fee arrangements used across traditional and alternative asset classes, and outlines key considerations for investors evaluating performance-based fee structures.