Index providers deny Claim investors incur extra charges above advertised headline rates
Practitioners are criticising what they see as hidden fees in investable hedge fund indices, particularly the indices that use managed accounts on their platforms.
Investors have fed more than $10bn into indices run by firms including HFR, Lyxor, and PlusFunds. But critics - perhaps surprisingly including some index providers themselves - contend investors in some investable indices incur extra fees over and above the 30-70bps index providers advertise as their headline rate.
Chris Sugrue, chairman of PlusFunds, which itself provides investable indices based on S&P's Hedge Fund index, says other index providers: "Try to keep potential investors focused on the top-line fee, and not draw any questions about the deeper, more hidden charges."
Among the extra charges he mentioned are fees for the provider where a portion is rebated to managers on the platform. In some cases, providers are taking portions of the management and performance fee from managers, other times they levy an extra fee simply for being part of the platform - a 'pay for play' model.
Platform providers have countered that fee information is not hidden in their documentation, and not all charges apply to all index providers. Mark Ellis, director and co-founder of MSS Capital, which runs FTSE's investable hedge fund index, says the FTSE tracker product charges 1% management and no performance fee.
"The general running costs associated with the platform are contained in the publicly available offering memorandum - this is transparency," he said.
John Godden, HFR's managing director for Europe, does not deny charges are made by the provider but said these were charged directly to end-investors in HFR managed accounts, rather than to underlying managers for being part of the platform and investable index.
"Those fees are paid by the investors in the single-manager trust to HFR, not by the managers themselves," he says, adding these fees are then returned to the manager of the managed account.
HFR also earns an "incentive fee from each single manager trust in an amount equal to a percentage of any new appreciation." A portion of the incentive fee is paid to the trading manager of the single-manager trust, and a portion retained by HFR. This latter part, Godden says, is "less than 25%".
Nathanael Benzken, director of hedge fund relations and risk analysis at platform provider Lyxor, says that in the firm's capacity as the managed accounts' manager, Lyxor incurs costs for its operational and legal management, and "for its role as distributor of the managed account through our many distribution channels".
"Such costs," he adds, "are traditionally borne by the hedge fund manager on its management fees. Consequently, Lyxor and the manager will agree on the fact that a part of the management fee and performance fee be kept by Lyxor."
He says the fee amount charged to the managed account is "exactly the same as the fee amount charged on the (underlying manager's) benchmark fund," making the arrangement simple for the end investor.
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