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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.