Are funds with performance fees worth it?

I was asked the following question via Chatterbox a few months ago.

Do funds with performance fees do better than those that don’t. If so it would be useful to have this indicator

It's a very good question and I've not seen any evidence published to answer this either way. So this article looks to answer that question. But first, some of you may be unfamiliar with the concept of performance fees.

What is a fund performance fee?

A performance fee is a fee that is charged by a fund if certain investment return targets are hit. They usually are charged by investment trusts and targeted absolute return funds but you do occasionally see them in equity unit trust sectors.

Often the performance fees are levied in addition to the normal annual management charge but occasionally they replace it. What makes performance fees confusing is that how they are applied varies from fund to fund.