Chris Sier, chair of the Financial Conduct Authority's institutional disclosure working group, has criticised a new methodology to calculate and compare the fees of alternative investment funds as "fallen short" of including all costs.
A working group set up by the Standards Board for Alternative Investments (SBAI) last year to study fees in the sector has come up with a Standardised Total Expense Ratio (STER) to compare fees across alternative investment funds.
The calculation aggregates expenses and management fees charged to, or incurred by, a fund and also includes the costs of research bundled with dealing commissions, said the SBAI in a statement.
It excludes incentive fees, which will fluctuate as a function of performance, and trading related costs that will vary significantly and depend on the specific investment strategy.
"The STER calculation demonstrates the commitment within the alternative investment industry to providing transparency for the benefit of investors," said Thomas Deinet, executive director of the SBAI.
"While the standards already require full disclosure of fees and expenses, the STER provides a recommended method for aggregating, categorising and disclosing fund costs, including soft-dollared research costs, so that investors can more easily understand and compare costs on an ‘apples-to-apples basis'," he said.
However, Sier, who was named chair of the committee in August after it was tasked with further costs and disclosures work on the back of the FCA's final report of the Asset Management Market Study, told the FT the methodology did not cover key fund costs.
"The SBAI's STER explicitly excludes cost items like trading commission, equity financing and stock borrowing costs, which can be very large," said Sier.
"The STER is not suitable as a method for calculating all, or even most, of the cost incurred by hedge fund managers," he added, saying STER could be useful only for comparisons of structural costs.
The methodology was developed in response to needs amongst institutional investors for a standardised tool to compare and monitor structural costs between alternative investment funds and over time.
The SBAI defended the STER calculation, saying the inclusion of charges such as performance fees and trading-related costs "would distort the STER calculation and make it more difficult to use it for cost and monitoring comparison purposes", according to the FT.
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