Managed futures fund finds a way to hide some fees

Operational shift allows fund to stop disclosing some fees and show lower expense ratio

The $126 million Grant Park Managed Futures Fund Ticker:GPFAX has changed the way it accesses commodity-trading advisers, allowing it to stop disclosing certain fees and show a lower expense ratio.
Through a regulatory loophole, the fund's investment adviser, Knollwood Investment Advisors LLC, has found a way to hide a chunk of the fees it charges, according to Nadia Papagiannis, alternatives analyst at Morningstar Inc., and other such funds are likely to do the same.
The Grant Park Fund, like about half of the 35 managed-futures funds available, is a fund of commodity-trading advisers, or CTAs, which manage commodity futures.
The fund has to use these vehicles because mutual funds are not allowed to hold more than 10% of commodity futures directly.
In a major change, the fund has begun using swap agreements to access CTAs rather than having the CTAs manage a portion of the fund, Ms. Papagiannis said. By doing so, the fund no longer has to disclose many of the management and performance fees it pays.
Previously, the fund had accessed its underlying CTAs through separately managed accounts. Each account acted like an individual investor in the CTA, so it was charged an expense ratio and a performance fee.
Those fees were disclosed in its prospectus as underlying fund fees, and the maximum performance fee was noted in a footnote.
“They were disclosing it, now they're hiding it,” Ms. Papagiannis said of the fees.
David Kavanagh, chairman and chief investment officer of Knollwood, declined to comment.
In addition to no longer disclosing the fees, the fund is also taking on the extra cost of paying for the swap agreement and taking on additional counter-party risk.
The Grant Park Fund is not likely to be the only managed-futures fund to make the switch to swap agreements to shelter some of their management costs.
“The vast majority of these funds are leaning toward it,” said Aisha Hunt, partner in the financial services practice at Dechert LLP. “If they don't, they're going to be at a competitive disadvantage. It's a marketing issue.”
Beyond their fees, managed-futures funds have struggled with performance since the financial crisis, which ironically, is what put them on many investors' radar screens.
Because they employ trend-following strategies, managed-futures funds have suffered in the macro-driven, risk-on, risk-off environment that been a market benchmark since 2008.
The managed-futures-fund category at Morningstar has a three-year annualized return of -5.63, and year-to-date through mid-November, the category was down almost 8%.
In spite of the performance struggles, the category continues to attract dollars, though flows have slowed down tremendously. The funds had $652 million of inflows year-to-date through October, compared with $3.2 billion of inflows for all of 2011, according to Morningstar.
For the second year in a row, advisers ranked managed futures as the strategy they were most likely to add, according to this year's Morningstar & Barron's
Alternative Investment Survey.
Managed-futures funds have the financial crash to thank for their sticking power. It was then, while the world seemed to be falling apart, that the strategies' diversification benefits were most apparent. The average managed-futures strategy returned more than 15% in 2008 when the S&P 500 fell about 37%.
“No one was talking about them in 2007,” said Lee Munson, principal at Portfolio LLC. “They've always existed, but because they were investing in other things than the stock market, all of a sudden they got popular. The performance in 2008 was what got people interested, but they need a big, fat tail to trend.”