Would you pay 8% in fees for an illiquid alternatives fund?

January 17, 2014 Leave a comment

Would you pay 8% in fees for an illiquid alternatives fund?

The fees with Blackstone Group’s nontraded fund of hedge funds make 2 and 20 not so bad

By Jason Kephart   |  January 15, 2014 – 12:01 am EST

If the thought of paying the classic “two and 20” to a hedge fund makes you queasy, you may want to look away. Private-equity giant Blackstone Group is soliciting new shares for its $300 million Blackstone Alternative Alpha Fund, which carries a price tag that makes 2% in annual fees and 20% of profits look like a clearance sale. The nontraded fund of hedge funds has all-in annual costs of 8.28%, according to a filing with the Securities and Exchange Commission.That includes Blackstone’s 1.25% management fee, 2.18% of “other” expenses such as investor servicing and custody fees, an ongoing 0.85% distribution fee, and 5.83% of underlying fund fees. That all adds up to more than 10% in fees, but Blackstone has agreed to waive 1.83 percentage points of them.

The average liquid multialternatives fund charges 1.56%, according to Morningstar Inc.

On top of the Alternative Alpha Fund’s expense ratio, there is also a 3% sales load and a 2% redemption fee if shares are sold within 12 months of purchase. The fund could therefore cost upwards of 13%, if the shares are sold before one year ended.

It’s not that easy to sell shares though. The fund only repurchases shares periodically.

So what do you get for 8% of assets annually and limited liquidity?

A fund of 19 different hedge funds chosen by Blackstone, including 12 long/short equity managers, two global macro managers, two multimanager managers, one managed-futures fund, one credit-driven fund and one event-driven fund. Of course, that mix is subject to change at any time.

The fund has manage to outperform despite its expense-laden head winds. From its launch in April 2012 to the end of last September, the fund gained more than 11%, according to its most recent semiannual report. The Morningstar MSCI Composite AW Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds, had a return of just 5.35% over the same time period.

Still, that doesn’t answer the question of whether you get what you pay for.

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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