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SBAI creates standardised total expense ratio for alternative investment managers

Tuesday, October 03, 2017
Opalesque Industry Update - The Standards Board for Alternative Investments (SBAI), formerly the Hedge Fund Standards Board (HFSB), has released the results from the working group it established in 2016 to study fee terms, methodology and definitions. The SBAI is the standard setting body for the alternative investment industry, supported by approximately 200 managers and investors managing $3 trillion globally.

The SBAI working group has created a Standardised Total Expense Ratio ("STER") that calculates a single, standardised expense ratio to facilitate better understanding, comparison and monitoring of fees and expenses across alternative investment funds. The STER calculation aggregates expenses and management fees charged to, or incurred by, a fund. A unique and important feature of the new STER methodology is that it includes the costs of research bundled with dealing commissions (often referred to as "soft dollared research costs").

The result is a STER that is comparable across funds - whether the manager deploys a pass-through expense model or not; whether the manager uses "hard" or "soft" dollars to pay for research expenses; and whether or not support services are internal or outsourced. The STER 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. To make it useful for comparison purposes, STER 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. STER is intended to be a ratio that is provided in addition to a fund's existing fee and expense disclosures. Given the benefits of a simple, consistent and transparent comparison of costs among funds and peer groups, the SBAI encourages the industry to start to use the STER methodology.

Thomas Deinet, Executive Director of the SBAI said: "The STER calculation demonstrates the commitment within the alternative investment industry to providing transparency for the benefit of investors. 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."

John Richardson, Chief Operating Officer and General Counsel at Ionic Capital Management, said: "The general principles around disclosing fees and expenses are well known in the industry; however, to date there hasn't been a standard methodology for classifying costs and calculating a total expense ratio. The STER should be very useful for both investors and managers in establishing a standardised approach that aids in transparency and comparability."

Adrian Sales, Head of Operational Due Diligence at Albourne Partners, said: "Albourne commends the SBAI for their guidance on a standardised total expense ratio, which will provide greater transparency to investors, and will help both managers and investors understand the typical types of expenses charged to funds."

The paper detailing the STER methodology can be found here. Members of the SBAI Fee Terms and Definitions working group include representatives from Albourne Partners, Caisse de dépôt et placement du Québec, Ionic Capital Management, PAAMCO, The Rock Creek Group, Teacher Retirement System of Texas, Unigestion and Winton Capital.

The STER methodology is part of the SBAI Toolbox content, which serves as a guide only and is not formally part of the Standards and the "comply-or-explain approach". Other Toolbox content and standardised templates include Open Protocol risk disclosure, Administrator Transparency Reporting, a Standardised Board Agenda and a Cyber Security guide.

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