While some have viewed a fulcrum fee
as an incentive for managers to take bigger risks, that's less of a concern in ETFs, where investors have neither paid huge sales loads nor are they potentially saddled with redemption fees.
Such a free contracting environment is in stark contrast with the experience of the United States where an invasive regulation, permitting only fulcrum fee provisions, has driven almost all managers toward compensation schemes based exclusively on management fees.
With fulcrum fees, a manager who outperforms the hurdle variable receives a proportion of the positive differential, while they suffer a symmetrical deduction from the management fee in the case of underperformance.
For the performance fee, managers of traditional asset classes often design a fulcrum fee
that centers on the expected return, which is preferably an "alpha" return over the benchmark for that strategy--for instance, "benchmark plus 200 basis points.
When should fulcrum fees
(1) be preferred over flat fees or other performance fee structures?