GPs should be required to reveal the full costs of their fund management to help investors see the drag on returns, a whitepaper from the Pension’s Institute at Cass Business School said.
Research cited in the paper suggests that concealed costs – such as the bid-ask spreads an investment bank charges for a currency hedge or transaction costs – can make up to 85 percent of a fund’s total costs. The remainder is taken up by visible costs such as commissions, taxes and fees.
“No good reasons have been put forward for why all the costs of investment management should not be fully disclosed. They are after all genuine costs borne by the investors,” director of the Pension’s Institute, David Blake, said in the paper.
Blake suggests that costs could be reported in the form of a ‘rate of cost’ – which could be deducted from the gross rate of return to give a net rate of return – and so could be compared across an investor’s portfolio.
GPs are already being asked to explain their fee and expense allocations in more granular detail as investors dig deeper into their limited partnership agreements and side-letters. The conversations have been sparked by comments made by Securities and Exchange Commission (SEC) chief inspector Drew Bowden at PEI’s Private Fund Compliance Forum earlier this month.