Paying for performance

Paying for performance

Matt Levine on charging higher fees for increased performance. It’s not looked upon well, which doesn’t make sense.

One mental model you might have is: Shouldn’t the active managers’ share of the pie be reduced by competition? If Fund X outperforms by 60 basis points but takes 44 for itself, shouldn’t Fund Y swoop in and offer to outperform by 60 basis points but take only 30 for itself? Just asking the question makes it obvious that the answer is no. Sure, right, if lots of active managers could predictably outperform, then they might compete with each other on price. But as long as reliable outperformance is rare, investors should rationally prefer to pay a lot for outperformance rather than to pay less for underperformance.

Full post Is Paying for Performance Bad? at Bloomberg.com

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