The subject has been in the spotlight recently, with the Financial Markets Authority issuing guidance on what it considers "reasonable" in terms of performance fees for KiwiSaver funds.

Harbour's report examined ten equity funds offered in the New Zealand market and found a number of concerns with the way performance fees were structured.

"Performance fees have the potential to be the highest fee paid by retail investors yet they may not even know they are paying them or how much they are paying," the report said.

"Performance fees can reward fund managers for a job well done. The theory is that when the investor benefits from strong investment performance, the fund manager can also share in their success - a seemingly win-win situation.

"However, the NZ managed fund market experience is that not all performance fees are structured fairly or are transparent. Retail investors may be paying too much in performance fees, or even worse, paying a performance fee when comparable market performance has not even been achieved."

Harbour's analysis used five criteria from a recent Morningstar research paper on performance fees in Australia. These were: quantum; benchmark; performance hurdle and cap; high water mark; and crystallisation period.

The biggest problems were in performance hurdles, where nine out of ten funds weren't judged to be up to scratch (Harbour's Australasian Equity Fund passed on all five criteria) and benchmarks, in which eight of the ten funds weren't seen to have an appropriate equity benchmark.

Only half of the funds were deemed to have a reasonable mix of base management fee and performance fee (quantum).

"It appears few New Zealand managers are operating at a global best practice level when structuring performance fees," the report said.

"Most managers reviewed offered performance fees benchmarked against cash or an absolute level of return when investors are exposing themselves to equity risk. Investors have the potential to pay a performance fee for below market performance."