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Fulcrum Fees Are an Outdated Fix for a Modern Problem, say Lawyers

Lawyers at Simpson Thacher in a recent client alert observe that although fulcrum fees have been heralded as the savior of actively managed strategies, persistent structural and other constraints make them unattractive to advisers and even potentially detrimental to shareholders. They contend that the “industry would be better served by focusing its energies on finding ways to convince Congress to revisit the ban on performance fees for registered investment companies.” Under the private fund performance fee model prohibited in the mutual fund space, the performance fee is separate from the fund’s management fee, functioning as an additional layer for exceptional performance above the base management fee. This structure disconnects “the adviser’s base compensation from its incentive to outperform the index, thereby allowing advisers to offer products that put the risk of failing to beat benchmarks on the adviser,” according to the alert.  Further, traditional performance fees, utilizing features such as hurdles and clawbacks, can help the adviser manage its risk tolerance and protect shareholders from being overcharged for long-term mediocre performance. “Utilizing these features, a traditional performance fee model could allow an adviser to offer an actively managed fund with considerably more variance between base compensation and total compensation than is currently permitted by the fulcrum fee model,” the Simpson attorneys write.

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