Four factors contributing to hedge funds overpaying depositary services
27 April 2018 London
Image: Shutterstock
Many hedge funds are overpaying for depositary services, according to the UK independent depositary INDOS Financial Limited (INDOS).
Evidence collected by INDOS revealed that many hedge funds have chosen not to revisit their administrative and depositary arrangements since the implementation of the Alternative Investment Fund Managers Directive (AIFMD) in July 2014.
This results in managers missing the fact that their depositary charges are rising in line with assets under management in unnecessarily high fees, according to Bill Prew, INDOS CEO.
Prew has advised that larger funds should demand a more tailored fee model from their depositary, which reflects the work and risks involved.
Regulatory burden faced by alternative investment managers following the financial crisis is a factor in causing this.
Secondly, last year proved a generally profitable year for hedge funds; recent figures from Eurekahedge indicate net asset inflows of $94.7 billion into the industry compared to $55.1 billion from 2016.
According to INDOS, this positive reversal lessened the pressure to manage all costs within funds.
Thirdly, AIFMD depositary requirements in 2014 were new for many funds. The market for AIFMD depositary requirements was immature and approaches to pricing these services have evolved over time, meaning managers are able to negotiate better pricing when buying services today.
The tendency for administration and depository deals to be negotiated as a bundled package contributes as the fourth factor.
Administration fee rates decline as assets increase, but the same is not necessarily true for depositary fees.
Prew commented: “At this time of the year, investor focus on expenses increases since they want to understand what comprises ‘other expenses’ disclosed in year-end financial statements. The answer is, where possible, for a fund to unbundle administration and depositary contracts and thus to achieve a better deal for the manager, and more importantly, investors.”
Prew added: “And now, as the second Markets in Financial Instruments Directive has come into force there should be time to dust off the old files.”
Evidence collected by INDOS revealed that many hedge funds have chosen not to revisit their administrative and depositary arrangements since the implementation of the Alternative Investment Fund Managers Directive (AIFMD) in July 2014.
This results in managers missing the fact that their depositary charges are rising in line with assets under management in unnecessarily high fees, according to Bill Prew, INDOS CEO.
Prew has advised that larger funds should demand a more tailored fee model from their depositary, which reflects the work and risks involved.
Regulatory burden faced by alternative investment managers following the financial crisis is a factor in causing this.
Secondly, last year proved a generally profitable year for hedge funds; recent figures from Eurekahedge indicate net asset inflows of $94.7 billion into the industry compared to $55.1 billion from 2016.
According to INDOS, this positive reversal lessened the pressure to manage all costs within funds.
Thirdly, AIFMD depositary requirements in 2014 were new for many funds. The market for AIFMD depositary requirements was immature and approaches to pricing these services have evolved over time, meaning managers are able to negotiate better pricing when buying services today.
The tendency for administration and depository deals to be negotiated as a bundled package contributes as the fourth factor.
Administration fee rates decline as assets increase, but the same is not necessarily true for depositary fees.
Prew commented: “At this time of the year, investor focus on expenses increases since they want to understand what comprises ‘other expenses’ disclosed in year-end financial statements. The answer is, where possible, for a fund to unbundle administration and depositary contracts and thus to achieve a better deal for the manager, and more importantly, investors.”
Prew added: “And now, as the second Markets in Financial Instruments Directive has come into force there should be time to dust off the old files.”
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