Peter Kraus, the Wall Street veteran who recently led AllianceBernstein Holding, is starting a mutual fund company — and aiming to shake up the industry's traditional fee model.
Italian insurer Assicurazioni Generali is backing Mr. Kraus's company and will contribute as much as $4 billion to Aperture Investors, according to a statement Thursday. The company will pay money managers based on fund performance rather than the volume of assets. Customers will be charged low ETF-like fees until their fund outperforms its benchmark.
"Portfolio managers will say they all want to perform, but at the end of the day, if they don't, they get paid basically the same as when they do perform. The motivation is to gather assets," Mr. Kraus said in a Bloomberg Television interview Thursday. "Our revenue model shifts that and says you only get paid if you do perform."
Mr. Kraus is expanding on a development he started at AllianceBernstein, which last year won approval to introduce performance-based fees for U.S. mutual funds.
The new venture comes at a time when money managers are being pressured by low-cost ETFs and money flowing from active managers to passive funds. Fidelity Investments this year introduced index mutual funds with zero fees, and the strategy attracted almost $1 billion in its first month.
Mr. Kraus's effort may face an uphill battle.
"It is laudable that they are pushing the envelope," said Jeffrey Ptak, global director of manager research at Morningstar Inc. "But how much money they attract will depend on how much they are able to outperform. I don't think the fee structure itself is going to sell people on the product."
Mr. Kraus thinks that his model will one day become the norm.
"Over time, call it the next 10 to 15 years, the industry will shift to revenue structures that actually are aligned with clients' incentives," he said. "Portfolio managers will struggle with this."
Mr. Kraus, 66, spent more than two decades at Goldman Sachs Group Inc. and was ousted as the CEO of AllianceBernstein last year as the firm's majority owner began to reshape its operations.
The executive has criticized the fund industry and the failure of active managers to outperform benchmarks. He's also expressed concerns about the ETF industry, saying there can be mismatches in prices for the funds and the market indexes they track, according to a 2015 interview with the New York Times.
Mr. Kraus said he's interviewed almost 100 portfolio managers leading up to starting the new venture.
"Most people have said I like being paid on a fixed fee because it's too risky to get paid on performance," he said. "I actually don't want that person."