Terry Smith: Buffett shows performance fees don't work

City veteran Terry Smith, who will shortly launch his own fund management group, has hit out at performance fees which he argues do nothing more than destroy investor returns.

Smith, the Tullett Prebon CEO and deputy chairman of Collins Stewart, says a good example of how performance fees can erode returns for underlying investors can be seen by studying Warren Buffett's Berkshire Hathaway vehicle. He says a $1,000 investment in Berkshire shares when Buffett began running it in 1965 would have been worth $4.3m at the end of last year. However, Smith says if Buffett had set up Berkshire as a hedge fund and charged 2% of the value of the funds as an annual fee plus 20% of any gains, $4m of the return would belong to him as manager and only about $300,000 woul...