Q:

hypervisor performance when running from USB

Just wondering if there is any performance impact / degradation when running from USB key
I'm planning on using KVM or xen, since my servers doesn't have on board raid controller, I'm planning on cutting the cost down and use USB keys. 
Thank you 

A:

Depends entirely on the speed of the USB port (and bus), in addition to the speed and quality of the USB key itself, but it certainly can be done.
The typical enterprise way of doing what you're attempting is to buy a server with a micro-SD slot, load up the hypervisor onto a high-speed micro-SD card, and run the VMs from locally-attached storage or a SAN, but there's no reason that you can't use a USB key in lieu of a micro-SD slot.
Just make sure you don't plug the USB key into a USB 1.0 port, or your performance will suffer.  (Likewise, don't buy the low-speed bargain bin USB keys you can pick up for ~$1/GB, or you won't get the transfer speeds you need, even when plugged into a USB 2 or 3 port.)

A:

Assuming you are:

Using a quality USB drive
Not using the host's filesystem for the virtual machines
Not actually running anything but virtual machines from the host

you should be ok.
A few things I would look out for however are:

USB drives can easily get knocked around, snapped off, caught on cables, etc.  Make sure it is physically secure and safe from accidental damage.  If it's possible to attach it inside the server, do so.
Likewise, USB drives are a lot easier to steal without people noticing right away compared to an internal drive - extra care should be taken to ensure the server is physically secured.
USB drives wear out quickly compared to hard drives.  This could be an issue if logs are stored on the drive.  Move any log files somewhere on the SAN.
Make sure it is labeled, and everyone knows that USB drive is essential to the server so it doesn't accidentally get unplugged.
If your server supports it, industrial compact flash or SD cards are a better option - they won't wear out as fast, nor be as easily removable

