
How to avoid high TERs from killing your fund |
Date: Thursday, October 31, 2013
Author: Apex Fund Services
The traditional route of setting up a hedge fund usually involves engaging in
a series of meetings with lawyers, fund administrators, accountants, prime
brokers and compliance professionals. As would-be managers tot up the different
fees costs soon look to soar past $250k+. In the days where $100m start ups were
common and $50m even more so these costs were bearable and make business
sense.But with investors shying away from seeding start ups and instead seeking
those funds with at least a one year track, start up managers risk setting up
"white elephant" funds. This is where high set up and ongoing fund costs create
TERs so high that the funds become uninvestible as returns are dragged down.
To overccome this hurdle start up managers should consider utilising platform
structures that allow funds to set up with lower costs. It is now possible for
funds to set up (with all of their legal documents) have all corporate
secretarial and directors taken care of, have a tier one fund adminstrator and
an audit from a top four accountancy firm for less than $50,000 in the first
year. For those funds likely to be below $20m at start up it is a much better
solution than incurring massive costs from day one. It allows emerging managers
to begin generating impressive fund NAVs without fund costs dragging down their
performance.
Whilst $50,000 is not a small sum by any means, but many managers may chose to
cover this cost during the first 12 months rather than see it impacting
performance. Even if covered by the fund TER excluding management performance
fees a $5m fund would be less than 1%.
Once funds reach a meaningful size ($25m+) funds may then want to consider their
own structure. It is a relatively straightforward approach to then transfer the
fund assets and the all important track record to the new fund.
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