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The “standardised total expense ratio” (STER) calculation aggregates expenses and management fees charged to, or incurred by, a fund. It is intended to be reported in addition to existing fee and expense disclosures.
The Standards Board for Alternative Investments (SBAI), formerly the Hedge Fund Standards Board, said the methodology was developed “in response to needs among institutional investors for a standardised tool to compare and monitor structural costs between alternative investment funds and over time”.
The SBAI – the membership of which consists of both alternatives providers and asset owners – emphasised that the calculation excluded performance fees, trading-related costs and charges related to entry or exit from a fund because their inclusion would distort the calculation and make it more difficult to use for cost monitoring and comparison purposes.
Thomas Deinet, executive director of the SBAI, said: “While the [SBAI’s] standards already require full disclosure of fees and expenses, the STER provides a recommended method for aggregating, categorising and disclosing fund costs, including soft-dollared research costs, so that investors can more easily understand and compare costs on an ‘apples-to-apples’ basis.”
“Soft dollared” research costs are research costs that are bundled with brokerage dealing commissions and hence not readily identifiable by investors. “Hard dollars”, in contrast, refer to cash payments for research that are reported separately.
The SBAI said the inclusion of soft dollar research costs was “a unique and important feature” of the STER methodology. MiFID II rules for mainstream funds sold in Europe will require the unbundling of such costs from January.