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Lipper calls for clearer disclosure of fund performance fees

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Lipper has identified 81 open-ended funds in the UK with performance fees in place, a rise of 138 per cent from the 34 funds identified at the end of 2007 but still less than five per cent of the industry’s total number of funds.

Among hedge funds where Lipper has calculated total expense ratios, the asset-weighted average is 1.82 per cent and the mean is 2.48 per cent — before the impact of performance fees, which can often double the level of operating expenses incurred.

The report says: “Clearer disclosure of such costs would certainly help investors.”

Two thirds of UK funds (66 per cent) can charge a performance fee if the fund outperforms a falling index. 

Among those funds that must beat an index to earn a performance fee, fewer than a quarter (22 per cent) use a cash-like index (such as Libor), indicating that far more funds than just those seeking absolute returns use performance fees.

Lipper has published its ten-point list of fee standards for hedge funds, which can be used as guidelines for disclosing fees and expenses by fund companies, as well as a checklist for investors’ due diligence.
Ed Moisson, author of the report, says: “Three themes emerge in the report: the need for companies to demonstrate they are aligning their interests with those of investors, the clarity and range of information for investors, and the onus on fund companies to take on a fiduciary responsibility in relation to fees.”

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