Profit Shares & Performance Fees: Are They Really Worth It?

In today’s episode, we break down profit shares and performance fees, one of the most debated topics in the asset management industry. Are they a fair way to align incentives, or just another way for fund managers to charge more?

We get into the nitty-gritty of who can charge performance fees in India and how it works, the meaning of terms like management fee, hurdle rate, catch-up, and high watermark, and whether performance fees actually create skin in the game for fund managers. We also discuss why losses and performance fees don’t go well together, whether investors should care about profit shares or just post-fee returns, and whether paying a performance fee is ever worth it.

We also explore some of the murky areas of the industry, including hidden fees, commission structures, and the psychology behind why investors accept certain charges without question.

At Capitalmind PMS, we don’t charge a performance fee, and we explain why we chose this model. If you’ve ever wondered how fee structures impact your long-term returns, this episode is a must-listen.

00:00 Introduction and Disclaimer 00:42 Overview of Performance Fees 02:35 Understanding Management Fees 05:32 Performance Fees and Hurdle Rates 07:34 Catch Up and High Watermark Concepts 11:04 Complexities in Fee Structures 14:31 Skin in the Game and Incentives 29:34 Management Fee Only Model 31:17 Incentives and Performance in Fund Management 32:43 Principles of Charging Profit Share 33:14 Small Funds and Profit Share Justification 34:41 Mutual Funds and Profit Share Dilemma 35:49 Historical Examples and Active Management 37:37 Challenges in Asset Management 45:20 Regulatory Perspectives on Fees 51:09 Evaluating Investment Options 56:52 Final Thoughts on Profit Shares