What type of investment is characterized by performance-based manager compensation?

The type of investment characterized by performance-based manager compensation is hedge funds. Hedge funds typically employ compensation structures that include performance fees, which incentivize managers to deliver high returns to their investors. This profit-sharing model aligns the interests of the managers with those of the investors, as managers are rewarded based on the fund's performance rather than receiving a flat fee regardless of results.

Hedge fund managers often charge both a management fee and a performance fee, which creates a strong motivation for them to achieve superior performance. This structure contrasts with other investment vehicles, such as actively managed mutual funds, which may not have as aggressive performance incentives, or exchange-traded funds, which usually have lower management fees and do not involve performance-based pay. Pension funds also typically have a more steady fee structure in place given their long-term objectives and the nature of their investments.