Administration Fees and Annual Operating Costs

By: Custom House Group  05/12/2011
Keywords: investment management, Investment Manager, Managed Account

Custom House's fees for the provision of adminstration servcies are negotiable, on the basis of a percentage of the Net Asset Value (NAV) of the Fund, payable monthly in arrears, but subject to an agreed minimum monthly fee.

The level of the fee will be dependent upon a number of factors, including, but not limited to:

  1. Type of fund or account - i.e. stand alone, fund of funds, multi-strategy, manged account or managed account platform;
  2. the initial size of the fund at launch;
  3. the projected size of the fund after 12 months in operation;
  4. the anticipated number of Shareholders;
  5. the minimum subscription level;
  6. frequency of dealing (daily,weekly or monthly,etc.);
  7. whether open-end, closed-end, or capital protected;
  8. whether single or multi-manager;
  9. how many brokers/trading banks will be used;
  10. complexity of accounting procedures;
  11. complexity of investment strategy;
  12. whether equalisation is required and if so, what method;
  13. level of activity in the fund;
  14. income i.e. (pays dividend) or accumulation;
  15. regularity of reporting to Shareholders;
  16. whether the fund will accept US Taxpayer investors as subscribers and, therefore, requires US tax reports (PFIC/KIs); and therefore
  17. whether the fund is a "Master-Feeder" fund and requires partnership accounting for any LPs or the Master Fund;
  18. whether the fund requires German Tax reporting;
  19. whether the fund needs any subsidiary trading company(ies) in order to, for example, avail of a particular double tax treaty;
  20. the jurisdiction of the fund.

Custom House will quote for providing administration services after analysing the structure and other requirements of the fund, bearing in mind, inter alia (1) to (20) above.  By way of example and illustration only, the level of fees charged by Custom House, which are normally payable monthly, can start as low as 0.10% of the NAV annualised (ie 10 basis points), for a US$100 million monthly dealing fund with only a few Shareholders.  On the other hand, the fee charged for a small daily dealing, multi-advisor fund, using a number of brokers and with a large number of small investors, could be 1.0% p.a. of NAV or higher.  Both levels of fee could be subject to reduction, when the fund achieves higher NAV levels.  In addition to the agreed fees, the fund will reimburse Custom House for approved out-of-pocket expenses and disbursements incurred in carrying out its duties.

All fees will be subject to a minimum charge, which will also be determined on the basis of items (1) to (20) above.

It should be noted that the cost of administration, and therefore the related fees, for an Irish domiciled fund are likely to be substantially higher than for funds established in most other jurisdictions, reflecting the increased cost of compliance with the stringent Irish regulatory and other reporting requirements.

As stated, fees are normally charged on a per fund or, if it is an umbrella fund, per sub-fund basis.  However, if there are cost savings and economies of scale that can be achieved, for instance spreading fixed costs (Government and registered office fees for example) when administering an umbrella fund, or as a result of growth in the NAV of a fund, these will be taken into account when negotiating the fees.

Registrar & Transfer Agency or Shareholder Services Fees

This function will usually be carried out by Custom House.  The Registrar and Transfer Agent's fees are usually calculated on the basis of a flat transaction fee per subscription, redemption or transfer of shares.  The above fees will be subject to an agreed minimal monthly or annual fee.

Included in this fee is the provision of CHARIOT ("Custom House Accessible Reporting in Open Technology") Cusom House's secure web reporting platform.

Other Annual Operating Expenses

Excluding Administration and Shareholder Services fees described above, the annual operational costs of a fund can be broadly broken down as follows:

  1. Investment Management fees
  2. Incentive or performance fees paid to Investment Manager
  3. Transaction charges/brokerage commissions
  4. Custodial fees (if any)
  5. Cash Management Fees (if any)
  6. Company Secretarial fees
  7. Jurisdictional expenses (local government and registered agent's fees)
  8. Director's fees
  9. a) Audit b) Financial Statements c) Cayman FAR filing (if appropriate)
  10. Legal
  11. Price publication (FT/IHT et al - if any)
  12. Stock Exchange listing (if appropriate)
  13. Miscellaneous (out-of-pocket expenses, printing etc.)
  14. Annual charges for maintaining subsidiary trading companies (if required)

The highest single overhead for most funds is the cost of investment management, particularly if the fund is profitable and the investment manager is paid an incentive, or profit participation fee, although, of course, from the investor's point of view, the bigger the actual incentive fee, the better.

Transaction Charges

The second highest overhead item is likely to be the transaction charges - brokerage commissions - although these will, in turn, be dependant upon a number of factors, including obviously the commission rate charged, as well as the level of trading activity and the market sector involved. For example, a currency futures contract, executed across any futures exchange, will incur a commission charge, whereas a forward currency transaction, executed in the interbank market, will be traded on a "spread" price but with no commission - i.e. the transaction charge is built into the spread price.

For the most part the impact of the investment management fees and transaction expenses are unquantifiable in advance, because of their dependency upon the trading activity and profitability of the fund, as well as the size of the fund.

Custody and Administration Fees

Audit Fees

Usually, the next largest overhead item will be the audit and related fees, such as the cost of preparation of Financial Statements and, if a Cayman or BVI fund, the additional cost of the Cayman or BVI FAR.  Furthermore, if a Cayman or Maltese fund audit is carried out in another jurisdiction, there will be a requirement for local audit sign off, which may incur extra fees.

Other Operational Expenses

Most, if not all of the other fees and operational expenses are fixed and, therefore, quantifiable in advance. The effect of these operational expenses, even including administration fees (but excluding management fees and transaction costs) are likely to be relatively negligible in the context of a high performance fund, - probably, in aggregate, somewhere between 0.2% and 0.5% of the NAV per annum, - but this can be as high as 1% or more for a small fund, recognising, of course, that the smaller the fund, the higher the impact of the fixed costs and minimum custodial and administration fees.

For example, the annual operating cost for a fund of €10 million NAV, with two fee earning directors, an audit fee of say €16000, but no additional legal fees and which is not listed, either on the Stock Exchange or in the FT or International Herald Tribune, will be approximately 0.90% of the NAV p.a. (ie €90,000). This of course rises to 1.8% p.a. if the fund only has an NAV of €5m, whereas of course for a fund of €70 million NAV, the fixed costs are of relatively negligible consequence (0.20%).  It has to be said that if the fund incurs additional legal fees (at say €5,000), price publication (FT), Stock Exchange listing and some additional miscellaneous expenses, the annual cost for a €10 million fund would probably only increase to circa 1.00% per annum. This is still relatively negligible in the context of high performance managed futures or hedge fund which expects to achieve an annual return of circa 20% per annum and will, as shown, decline as a percentage of the NAV as the fund grows.

Obviously it is difficult to quantify annual operating costs because there are so many variables. The fixed costs however can be assessed before the fund is launched and the following are some examples of costs that may be incurred:

  • Corporate expenses, for a Bahamian or BVI fund, which include local government license and fund registration fees, registered agents fees and the provision of the registered office in the chosen jurisdiction, plus some out of pocket fees, will range between US$3,000 and US$4,000 p.a. Cayman Funds are more expensive at circa US$5,000.
  • Directors’ fees in the first year will range from not less than €5,000 to €10,000 or even €20,000 per annum per director, plus expenses, but could be higher depending on the size and complexity of the fund and the status of the director appointed, as well as the domicile of the fund.
  • Company Secretarial fees will be not less than €200 per month / €2400 per annum for service with additional hourly fees charged if there is an abnormal or additional amount of corporate secretarial work involved, which may be the case with funds that establish numerous brokerage accounts or subsidiary companies.
  • Audit fees, even for the simplest fund, are unlikely to be less than €15,000 per annum and for a complicated fund could rise to €18/20,000 even or more, quite rapidly. Audit costs for Cayman and Maltese funds will be even higher if the audit is carried out in another jurisdiction, because of a regulation requiring all Cayman and Maltese fund audits to be signed off by a local auditor.
  • BVI or Cayman FAR ("Fund Annual Return") filing, if required.
  • There should not be any additional legal fees, except for funds where the activities require on-going legal advice, such as Real-Estate funds. However, in such cases, legal advice will in all likelihood be considered to be part of the transactional costs. However added legal costs may be incurred, for example, when a derivative fund wishes to open an account with a bank and that bank requires a legal opinion to confirm that the fund is able, under its Articles, to open such an account.
  • The cost of publishing the share price of the fund in the Financial Times or IHT, if required.
  • Stock Exchange annual listing fees, which are levied per fund or sub-fund, will vary depending on the Stock Exchange.
  • Finally allowance should be made for miscellaneous out-of-pocket expenses such as printing and distributing hard copies of the monthly reports and the annual audited report, if required and any other out-of-pocket expenses that may be incurred by the various service providers and which are payable by the fund.
The information in this article was current at 02 Dec 2011

Keywords: Asset Value, investment management, Investment Manager, Managed Account, Partnership Accounting

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