Guideline

Requirements

Performance fee calculation methodologies

Performance fees can be calculated on a single investor basis.

Consistency between performance fee calculation models and investment objectives, strategies and policies

Managers must implement and maintain a process to review and demonstrate that the performance fee model is consistent with a fund’s investment objective, strategy and policy.

If a fund is managed in reference to a benchmark index and it employs a performance fee model based on a benchmark index, the two indices should be the same. Consistency indicators which should be taken into account by the manager include: expected return; investment universe; beta exposure to an underlying asset class; geographical exposure; sector exposure; income distribution of the fund; liquidity measures (e.g. daily trading volumes, bid-ask spreads etc.); duration; credit rating category; and volatility and/or historical volatility.

If the reference indicator changes during the reference period, the performance of the reference indicator for this period should be calculated by linking the benchmark index that was previously in force until the date of the change and the new reference indicator used afterwards.

Frequency for the crystallisation of the performance fee

The crystallisation frequency should not be more than once a year.

The above requirement does not apply where the fund employs a high water-mark (HWM) model or a high-on-high model where the performance reference period is equal to the whole life of the fund and it cannot be reset.

The crystallisation date should be the same for all share classes of a fund that levies a performance fee.

In the case of closure/merger of funds and/or upon investors’ redemptions, performance fees, if any, should crystallise in due proportions on the date of the closure/merger and/or investors’ redemption. In the case of the merger of funds, the crystallisation of the performance fees of the merging fund should be authorised subject to the best interest of investors of both the merging and the receiving funds.

Negative performance (loss) recovery

In order to avoid misalignment of interests between the fund manager and the investors, a performance fee could also be payable in case the fund has overperformed the reference benchmark but had a negative performance, as long as a prominent warning to the investor is provided.

In case the fund employs a performance fee model based on a benchmark index, it should be ensured that any underperformance of the fund compared to the benchmark is clawed back before any performance fee becomes payable. To this purpose, the length of the performance reference period, if this is shorter than the whole life of the fund, should be set equal to at least five years.

For the HWM model, in case the performance reference period is shorter than the whole life of the fund, the performance reference period should be set equal to at least five years on a rolling basis. In this case, performance fees may only be claimed if the outperformance exceeds any underperformances during the previous five years and performance fees should not crystallise more than once a year.

Disclosure of performance fee models in fund documents

In case a fund allows for a performance fee to be paid in times of negative performance (for example, the fund has overperformed its reference benchmark index but, overall, has a negative performance), a prominent warning to investors should be included in the KIID.

In case a fund managed in reference to a benchmark computes performance fees with a benchmark model based on a different but consistent benchmark, the manager should be able to explain the choice of benchmark in the prospectus.

The prospectus should include concrete examples of how the performance fee will be calculated to provide investors with a better understanding of the performance fee model especially where the methodology allows for performance fees to be charged even in case of negative performance.