Quarterly Letter: Fresh Lemonade from Old Lemons
Genuine novelties in our industry are rare. However just because an idea is not new does not mean it cannot or should not be revisited. This juxtaposition of new and old comes firmly to mind in discussions around performance fees.
In the asymmetric market for active equity strategies, performance fees conceivably offer a way to bridge the information gap. By offering an index base fee plus performance percentage, the manager is implicitly communicating to the client a high level of confidence that its skills are highly above average. The client, in turn, requires a lower level of conviction to ensure that the manager isn’t simply misguided about its abilities.
Performance fees are not a new concept; however, don’t let the lack of novelty put you off. They potentially have new relevance to our industry, whether through genuinely fresh thinking around how they apply and where they apply, or by looking at them through a different lens.