Wednesday January 12 2022

News Source: Fund Regulation

Focus: Assessment of Value

Type: General

Country: Denmark

The transition period for ESMA’s guidelines on performance-based fees in UCITS and certain types of AIFs has expired at the turn of the year, and the guidelines now apply to both existing and new funds.

The guidelines aim to promote greater convergence and standardization in performance-based fees, as well as to promote convergence in the supervision of the competent authorities. In addition, the guidelines must ensure that the performance-based fee models used by managers are in line with the principles of acting honestly and fairly.

The Danish FSA has identified a special need to create clarity regarding guideline no. 2 on the connection between performance-based fees and the fund’s investment goals, strategy and policy.

It follows from the guideline that the manager should establish and maintain a process for demonstrating and regularly ensuring that the performance-based fee model is in line with the fund’s investment objectives, strategy and policy.

That the model is “in accordance with the fund’s investment purpose, strategy and policy” means that the model’s reference indicator must reflect the return / risk profile of the fund’s investments. This is true whether the model is absolute or relative.

This means, for example, that a fund that invests in equities should use a reference indicator that reflects the return on such an investment. If the remuneration model is relative, a relevant reference indicator will be a relevant market index. If the model is absolute, a relevant reference indicator will be a relevant hurdle rate, which e.g. the strategy reflects historical returns. For mixed funds that allocate between multiple asset classes, the benchmark should reflect returns and risk throughout the investment universe based on a relevant neutral portfolio.

The Danish FSA emphasizes that ESMA is the interpreting authority for these guidelines. Therefore, reference is made to e.g. ESMA answers to question 15 in “Final Report: Guidelines on performance fees in UCITS and certain types of AIFs”, (3 April 2020 | ESMA34-39-968).

The Danish FSA’s previous briefing on the guidelines for performance-based fees

ESMA Guidelines on Performance Fees

ESMA report on performance-based remuneration

 Click on the above link for further information.