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2013 Business Expense Benchmark Survey
The Fund Chargeback “Smile”
One of the areas that we delved into in depth in this year’s report was the treatment of third party
expenses and the proportion of those outlays that are charged back to the fund level as opposed
to being paid by the management company. The results of that analysis showed a very interesting
pattern. This is illustrated in Chart 19.
Firms with $100 million AUM charged back 33% of their
third party expenses to the fund level, and covered
the remaining 67% of these outlays through their
management company. This percentage being charged
back to the fund increased modestly to 35% for firms
with $500 million AUM, and then jumped appreciably
to 49% for firms at $1.5 billion AUM. This is the peak
percentage of charge-backs noted in our analysis.
As noted in the earlier sections, firms at $1.5 billion
AUM are just beginning to spend significant sums on
building out their capabilities and infrastructure as
they surpass the institutional threshold. This increases
the pressure on their still relatively small operating
margins, encouraging them to pass through as many
costs as possible.
The percentage being charged back at the fund level
begins to decline as AUM and operating margins
continue to expand—falling to only 42% for firms with
$5.0 billion AUM, 38% for hedge funds with $10.0 billion
AUM and returning almost to their starting point at only
32% for firms with >$10.0 billion AUM.
When viewed on a percentage basis, this pattern of
charge-backs looks very much like a smile, as shown in
Chart 19.
Actual basis points being charged back to the fund
follow a different pattern, however. Firms with $100
million AUM charge the fund an average of 46 basis
points across our survey population. This figure drops
sharply as firms surpass break-even at $300 million
AUM. At $500 million AUM, firms charge back 15 basis
points and the amount being charged back remains
steady, between 14 and 17 basis points as AUM continues
to grow. It is only after firms surpass the $10 billion AUM
threshold that we see another appreciable shift. Survey
participants that had >$10.0 billion AUM on average
charged back only 6 basis points of expense to the fund.
Chart 19: Treatment of Third Party Expenses
(Management Company Charge vs. Fund-Level Chargeback)
Source: Citi Prime Finance. Total dataset examined (124 firms, $465 billion AUM)
$100M
$500M
$1.5B
$5B
$10B
>$10B
Charged Back to Fund
Management Company
33%
0%
20%
30%
40%
50%
60%
70%
80%
90%
100%
10%
35%
49%
42%
38%
32%