Incentive Fee

AAA

DEFINITION of 'Incentive Fee'

A fee paid to a fund manager by investors. Incentive fees are typically dependent upon the manager's performance over a given period and are usually taken in relation to a benchmark index. For instance, a fund manager may receive an incentive fee if his or her fund outperforms the S&P 500 Index over a calendar year, and may increase as the level of outperformance grows.

INVESTOPEDIA EXPLAINS 'Incentive Fee'

Incentive fees are usually in place to tie a manager's compensation to their level of performance, more specifically their level of financial return. However, such fees can sometime lead to increased levels of risk taking, as managers attempt to increase incentive levels through riskier ventures than outlined in a fund's prospectus.

RELATED TERMS
  1. Layered Fees

    Two sets of management fees that are paid by an investor for ...
  2. Incubated Fund

    A fund that is offered privately when it is first created. Investors ...
  3. Portfolio Manager

    The person or persons responsible for investing a mutual, exchange-traded ...
  4. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  5. Fund Manager

    The person(s) resposible for implementing a fund's investing ...
  6. Warren Buffett

    Known as "the Oracle of Omaha", Buffett is Chairman of Berkshire ...
RELATED FAQS
  1. What impact does inflation have on the time value of money?

    The impact that inflation has on the time value of money is that inflation decreases the value of a dollar over time. The ... Read Full Answer >>
  2. How do waivers, reimbursements and recoupments affect a fund's expense ratio?

    Waivers, reimbursements and recoupments can initially serve to keep a fund's expense ratio lower than it would be otherwise. ... Read Full Answer >>
  3. What information should I focus on in my mutual fund's prospectus?

    The U.S. Securities and Exchange Commission (SEC) requires investment companies to provide potential and current investors ... Read Full Answer >>
  4. What information does the SEC require in an investment company's prospectus?

    A prospectus is the document provided by registered investment companies to investors that is meant to assist them in making ... Read Full Answer >>
  5. What's the difference between the hurdle rate and the high water mark?

    Hurdle rate and high water mark are two types of benchmarks that hedge funds can set as requirements for collecting incentive ... Read Full Answer >>
  6. What is the difference between passive and active portfolio management?

    Investors have two main investment strategies that can be used to generate a return on their investment accounts: active ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    How To Pick A Good Mutual Fund

    Learn how to evaluate mutual funds and find the right one for you.
  2. Mutual Funds & ETFs

    Stop Paying High Mutual Fund Fees

    Discover how investment strategies and expense ratios impact your mutual fund's returns.
  3. Mutual Funds & ETFs

    Lower Your Fees With Mutual Fund Breakpoints

    The lower the sales charge you pay, the greater your returns. Find out how to cash in.
  4. Markets

    Get Tough On Management Puff

    Company managers are often skilled at fooling investors. Be critical and don't believe the hype.
  5. Mutual Funds & ETFs

    That's A (Mutual Fund) Wrap!

    These advisory programs offer professional supervision and other handy tools for building a diversified portfolio.
  6. Options & Futures

    Hedge Funds: Higher Returns Or Just High Fees?

    Discover the advantages and pitfalls of hedge funds and the questions to ask when choosing one.
  7. Investing

    Feex: A Tool To Reduce Investment Management Fees

    If someone were to ask what the management fees are on your investment accounts, would you know the answer? The truth is most people have no idea how much they pay their broker annually.
  8. Mutual Funds & ETFs

    How Janus Capital Makes Money

    Before investing in Janus, it is prudent to understand how it makes money and what costs detract from shareholder wealth.
  9. Stock Analysis

    What Makes Goldman Sachs a Good Bet?

    Six years after the subprime meltdown, Goldman Sachs is a robust $87 billion company instead of a historical footnote. Here's why.
  10. Active Trading Fundamentals

    How To Avoid The 5 Most Dangerous Market Scenarios

    Recognizing the five most dangerous market scenarios can save a fortune in avoidable losses, setting the stage for long term success.

You May Also Like

Hot Definitions
  1. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  2. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  4. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  5. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  6. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center