SBAI Debuts New Standardized Total Expense Ratio For Alt Investment Managers

Oct 3 2017 | 11:06pm ET

The Standards Board for Alternative Investments (SBAI), known until recently as the Hedge Fund Standards Board, has unveiled a standardized total expense ratio methodology that allows for comparison and monitoring of fees across alternative investment funds.

The new standardized total expense ratio (STER) approach is the result of a working group established in 2016 to study fee terms, methodology and definitions, the SBAI said. It was developed in response to needs amongst institutional investors for a standardized tool to compare and monitor structural costs between alternative investment funds and over time. 

In calculating a single, standardized expense ratio, the STER calculation aggregates expenses and management fees charged to, or incurred by, a fund. Importantly, the new STER methodology includes the costs of soft-dollar research bundled with trading commissions.

The result is a STER that is comparable across funds – whether the manager deploys a pass-through expense model or not; whether the manager uses “hard” or “soft” dollars to pay for research expenses; and whether or not support services are internal or outsourced, according to SBAI. To make it useful for comparison purposes, STER excludes incentive fees, which fluctuate as a function of performance, and trading related costs that will vary significantly depending on the specific investment strategy. 

The STER methodology is part of the SBAI Toolbox and is thus a guide only, the association added, and not formally part of the Standards. 

“The STER calculation demonstrates the commitment within the alternative investment industry to providing transparency for the benefit of investors,” said Thomas Deinet, executive director of the SBAI, in a statement. “While the Standards already require full disclosure of fees and expenses, the STER provides a recommended method for aggregating, categorizing and disclosing fund costs so that investors can more easily understand and compare costs on an ‘apples-to-apples’ basis.”

The paper detailing the STER methodology is available for download here.  Members of the SBAI Fee Terms and Definitions working group include representatives from Albourne Partners, Caisse de dépôt et placement du Québec, Ionic Capital Management, PAAMCO, The Rock Creek Group, Teacher Retirement System of Texas, Unigestion and Winton Capital, the organization said. 

The SBAI was rebranded from the HFSB in mid-September 2017. It originated in June 2007 when a group of leading alternative investment managers formed the Hedge Fund Working Group to develop industry standards in areas such as disclosure, valuation, risk management, governance and shareholder conduct. Today, the organization is supported by approximately 200 alternative investment managers and institutional investors with $3 trillion in aggregate capital, and is governed by a board of major investors and managers.

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