Fee paid as an incentive to the general partner of a hedge fund or, less frequently, the manager of a mutual fund, the amount of which depends on his/her performance, usually relative to some benchmark index. Such a form of compensation could in fact extend to any financial professional, but tends to be most common among people directly responsible for managing funds. Since managers are compensated based on actual results, they will try to get the best results for their clients, but the argument is sometimes made that an incentive fee might encourage the manager to take more risks than he/she otherwise would in pursuit of maximum returns. also called incentive fee.

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