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2013 Business Expense Benchmark Survey
Whenwe look at the sourceof these chargebacks, we see
that there is very little variation in what gets assigned
asfirms’progressthroughourvariousstagesofmaturity.
Chart 20 illustrates the breakdown of charge-backs
for emerging, institutional and franchise-sized firms.
As shown, in all instances the largest charge-back is
for operations, followed by third party charges related
to investment management.
Within the operations category, third party expenses
are spread out across the following subcategories:
administration, middle office outsourcing, fund
accounting, audit and tax and then an “other”
subcategory that encompasses legal and valuation
charges for the fund, as well as governance. The
category that accounts for the bulk of the operational
charge-backs is administration.
Prior to the GFC, many firms opted to do their own fund
accounting and investor reports as opposed to assigning
those functions to a neutral third party administrator.
Relying solely on internal books and records became
a questionable practice post-2008. Now, nearly all
hedge funds engage a professional administrator to
fulfill these functions. This is to ensure a level of comfort
for their investors, but, as such, it is also a function that
is typically charged back to the fund for those investors
to cover.
While we do not have the back data to test this
proposition, we have heard anecdotally from several
U.S.-based funds that the amount they are choosing
to charge back to the fund has increased in the years
post-GFC as they have come under pressure from
investors to lower their overall management fees. This
is a pattern that we will probe in coming reports as we
monitor both average management company fees and
fund-level chargebacks.
Since administration costs make up a substantial
share of fund-level charge-backs, we also decided to
test our “smile” hypothesis if we were to look at third-
party expense charge backs to the fund level without
administration. This is illustrated in Chart 22. As shown,
though the pattern is not quite as clear, the same
overall principles hold true, and it is again firms at the
$1.5 billion AUM level that charge back the most on a
percentage basis to the fund.
Chart 20: Fund-Level Expenses
Other
10.2%
Technology
6.8%
Operations
63%
Source: Citi Prime Finance. Other includes marketing, risk, compliance and business management.
Total dataset examined (124 firms, $465 billion AUM)
EMERGING: AVERAGE 30 BPS
INSTITUTIONAL: AVERAGE 16 BPS
FRANCHISE: AVERAGE 6 BPS
Investment
Management
20.1%
Other
5.5%
Technology
8.8%
Operations
66.5%
Investment
Management
19.1%
Other
6.4%
Technology
5.1%
Operations
70.6%
Investment
Management
17.9%