What is a Performance Fund?

A performance fund is an investment fund which is specifically targeted at getting the highest rate of return possible. This usually involves taking more investment risks. It does not make the fullest uses of measures such as hedging or diversifying which can lower the risks to investors.

Performance funds will usually target growth stocks. This term is often used for stocks which have a return on equity of more than 15 percent. That means the firm's annual income is worth more than 15 percent of the figure for its current market value. That likely means more money will be available for investment, for example in new factories.

The manager of a performance fund may also target performance stocks. These are generally in companies which retain most of their profits for reinvestment rather than paying them out as dividends. The theory is that this investment will help the company grow more rapidly and thus attract more stock buyer driving the price up.

Performance stocks are very different to other types of stocks which are forecast to grow quickly. These are sometimes known as glamour stocks or hot stocks. With such stocks, the belief in potential growth is usually driven by a more subjective analysis of a company's prospects, for example a belief that its industry sector may benefit from a change in public tastes.

A performance fund may also be referred to as an aggressive growth fund. This is because the fund managers specifically target stocks in companies expected to grow quickly. While the fund manager is not necessarily going to be acting recklessly, the strategy is likely to involve more gambles and the potential losses will likely be higher as well.

In many cases, a performance fund will make less use of diversification. This is a strategy of spreading investments across more stocks so that there is less risk of suffering badly if one stock collapses. Of course, this also limits the potential gain if one stock does particularly well.

Performance funds are also less likely to use hedging. In stock market investments, hedging involves taking advantage of the fact that you can short a stock, meaning you benefit if its price falls rather than rises. Hedging can be used to protect against events such as the entire industry of a chosen stock falling, which can mean losses even if the company itself is performing relatively well.