Friday April 2 2021

News Source: Fund Regulation

Focus: UCITS

Type: General

Country: Ireland

The Central Bank has published guidance for Performance fees of UCITS and certain types of Retail Investor AIFs.

This Guidance incorporates, to the extent currently possible and practicable, ESMA Guidelines on performance fees in UCITS and certain types of AIFs into the Central Bank’s regulatory framework.

Performance Fee Calculation Method:

A Responsible Person or Retail Investor AIF, in in respect of a performance fee calculation method:

  • should ensure the calculation of a performance fee is verifiable and not open to the possibility of manipulation.
  • should ensure the performance fee calculation method includes, at least, the following elements:
  1. the reference indicator to measure the relative performance of the fund. For this purpose the reference indicator can be an index (e.g. Eonia, Eurostoxx 50, etc.), a HWM, a hurdle rate (2%) or a combination (e.g.: HWM + hurdle rate).
  2. the crystallisation frequency at which the accrued performance fee, if any, becomes payable to the manager and a crystallisation date at which the performance fee is credited to the manager;
  3. the performance reference period;
  4. the performance fee rate which may also be referred to as the “flat rate” i.e. the rate of performance fee which may be applied in all models;
  5. the performance fee methodology defining the method for the calculation of the performance fees based on the abovementioned inputs and any other relevant inputs; and
  6. the computation frequency, which should coincide with the calculation frequency of the NAV (for example, if the fund calculates its NAV daily, the performance fee should be calculated and accrued in the NAV on a daily basis).
  • should ensure in relation to UCITS, reference to a new high net asset value in Regulation 40(1)(a) of the Central Bank UCITS Regulations is understood to include either a High-Water Mark model or a High-on-High model; and reference to an index in Regulations 40(1)(b) and 40(3) of the Central Bank UCITS Regulations is understood to include a benchmark or a hurdle rate.
  • should ensure the performance fee calculation method is designed to ensure that performance fees are always proportionate to the actual investment performance of the fund. Artificial increases resulting from new subscriptions should not be taken into account when calculating fund performance.
  • should ensure they are always able to demonstrate how the performance fee model of a fund constitutes a reasonable incentive for the manager and is aligned with investors’ interests.
  • should ensure the performance fee provisions and their final payments are allocated and reversed in a symmetrical way. For example, it should not be possible to apply simultaneously an allocation rate (e.g. 20% of the performance of the fund when the performance increases) and a different reversal rate (e.g. 15% of the – negative – performance of the fund when the performance decreases).
  • could calculate performance fees on a single investor basis. h. should, in the case of Retail Investor AIFs which have multiple managers or advisers, ensure that a performance fee is payable only on the performance of that part of the portfolio for which the investment manager or adviser is responsible.

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