On 5 November the European Securities and Markets Authority issued guidelines to govern performance fees in Undertakings for Collective Investments in Transferable Securities and certain types of Alternative Investment Fund. They apply to new funds from 5th January onwards in the European Union.

The guidelines were published in all official languages of the European Union, with a reference number of ESMA34-39-992EN. Guidelines of this kind take effect two months after their publication. These ones apply to managers of UCITS and managers of AIFs whom member-states allow to market units or shares of the AIFs that they manage in accordance with Article 43 of the Alternative Investment Fund Managers' Directive or AIFMD to retail investors in their territoroes. The guidelines also apply to AIFMs of those AIFs, except for closed-ended AIFs and open-ended AIFs that are EuVECAs (or other types of venture capital AIF), EuSEFs, private-equity AIFs or real-estate AIFs.

The idea is to make each fund's performance fee model comply with various principles to do with acting honestly and fairly in the course of business and acting with due skill, care and diligence in the best interest of the fund, thereby preventing the firm that runs the fund from charging the fund and its investors unduly. This is the EU's first attempt at a universal standard for the disclosure of performance fees to investors.

Fee models include the high-water-mark model, whereby the performance fee may only be charged on the basis of achieving a new high-water mark during the performance reference period. There is also the high-on-high model, whereby the performance fee may only be charged if the net asset value or NAV exceeds the net asset value at which the performance fee was last crystallised. The manager can be a management company or manco (as  defined in Article 2(1)(b) of the UCITS Directive), an investment company that has not designated a manco authorised in accordance with that directive, or an alternative investment fund manager or AIFM (as defined in Article 4(1)(b) of the AIFMD) of an AIF.

The City law firm of Simmons and Simmons has written: "If your fund is created after 5th January 2021 and uses a performance fee, the guidelines will apply to it immediately. If your fund was in existence as at 5th January 2021 and uses a performance fee, the guidelines apply by the beginning of the financial year following 5th July 2021. If the fund was already in existence as at 5th January 2021 and subsequently introduces a performance fee, the guidelines will then apply immediately."