GAIM Ops Cayman: Investors clamping down on fund expenses
A growing number of institutional investors are asking fund administrators to provide monthly data on their underlying hedge fund managers’ expenses.
“There is a major strategic initiative at institutional investors whereby they are asking fund administrators to provide details on managers’ fees and a look-thru on expenses charged to the fund on a monthly basis,” said Greg Robbins, chief operating officer at Mesirow Advanced Strategies, the $14 billion Chicago-based fund of hedge funds, speaking at GAIM Ops Cayman.
Investors are becoming increasingly sensitive to hedge fund expenses. Investors will usually pay fees in addition to the 2% management and 20% performance fee, which might cover administration, legal and director costs, stock loans, custody and research expenses.
Some managers though may be charging questionable costs to the fund - namely salaries, technology, insurance, trade errors, non-research related travel and entertainment, which should be covered by the management fee. Oftentimes, these charges are found in line items titled “other expenses” or “research costs” contained in financial statements or legal documents provided by managers to their investors.
“It would be embarrassing for the manager if they refused to disclose this information. Investors are going to increasingly ask for this information in the future. This is not just Mesirow but a growing number of funds of hedge funds are taking this approach,” said Robbins.
Investors are placing more emphasis on fund expenses amid thinning hedge fund margins. A survey of operational due diligence professionals by Deutsche Bank revealed the majority of respondents had little or no tolerance of certain expenses, such as non-research related travel or employee compensation being charged to the fund. Other expenses that were frowned upon included outsourced compliance and marketing.
The UK Financial Conduct Authority (FCA) is also taking a growing interest in asset managers’ use of client trading commissions to buy research. In a recent speech, Martin Wheatley, chief executive officer at the FCA, criticised managers for stretching the definition of what constituted research to cover non-eligible services and then charging these costs to investors instead of paying for it themselves through their management fees.
The Securities and Exchange Commission (SEC) has also indicated it will be delving deeper into hedge fund expenses. The SEC, according to reports, has said it will be scrutinising hedge fund fees and expenses charged to investors, such as travel and entertainment.