How Is Your Fund Manager Incentivised?

Most investors check a fund’s past returns. Fewer check how the manager gets paid.

Consider a fund heavily exposed to the AI trade: semiconductors, data centres, the usual names. Now imagine if that fund closes this year with a 15% loss?

Many performance fee structures include a high watermark and a hurdle rate.

Under a typical structure, the manager earns no performance fee until investors recover their losses and clear the hurdle.

After a 15% fall, that could mean that they fund requires a gain of roughly 25% the following year, before any performance fee is earned.

Understandably, the management fee is still charged throughout.

Think about the incentives. A manager facing that arithmetic may be tempted to concentrate further, add leverage, or swing for the fences.

The alternative is working for a year or two with no performance fee at all.

Some managers in that position simply close the fund and launch a new one with a clean watermark, leaving investors holding the losses.

None of this means every manager behaves this way.

Read the fee section of the PDS. It tells you what the manager is really paid to do.

“Show me the incentive and I’ll show you the outcome” – Charlie Munger

November 10, 2026

rob@karriasset.com.au