Many hedge funds that have not reviewed their administrative and depositary arrangements are being overcharged for these services, according to new research by INDOS Financial.
The independent UK depositary found that many hedge fund managers have not revisited their agreements since the implementation of the Alternative Investment Fund Managers Directive (AIFMD) in 2014.
“In doing so, some managers are missing the fact that their depositary charges are rising in line with assets under management resulting in unnecessarily high fees,” said Bill Prew, chief executive officer, INDOS Financial.
The analysis showed that hedge fund managers have been too focused on complying with incoming regulation than renegotiating fees. This has been evident with the shift in focus from AIFMD to MiFID II.
INDOS also found the fee rate for a typical contract for hedge fund administration will scale down as assets grow, most likely from 12 basis points to eight. However, it has found evidence that depositary fees are sometimes fixed at two basis points.
For example, a $250 million fund would be paying $50,000 per year in depositary fees and a $1 billion fund would be paying $200,000 per year.
“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,” added Prew.
“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.”