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Life settlement funds accused on ‘hazard’ fees

Life settlement funds have been criticised for charging performance fees as high as 75 per cent, as new research has shown two-thirds of the funds impose performance charges.

Managing Partners Limited last week said seven out of 11 UK life settlement funds charge “moral hazard” performance fees. For example, the £622m EEA Life Settlements fund splits returns above 8 per cent a year, with 37.5 per cent going to EEA and 37.5 per cent going to investment adviser Via Source. Only 25 per cent goes to clients.

Gartmore multi-manager absolute return fund has a 3.6 per cent position in the EEA fund, which has been sold heavily through IFAs.

The funds buy life policies from US clients and then pay the premiums until the original policyholder dies when they receive the settlement.

Some warn this is unaccep-table in open-ended funds, which have limited liquidity available in the event that policyholders live longer than expected. In February, the FSA threatened “enforcement proceedings” in misselling cases, after Keydata funds fell into chaos due to insufficient liquidity.

Rathbone head of multi-asset investment David Coombs says he has been visited by “aggressive” life settlement fund salesmen. He says: “A 75 per cent performance fee fails the sniff test. It is just red flag stuff for us and I would not buy life settlements.”

Hargreaves Lansdown head of advice Danny Cox says: “The moral hazard of a fund being able to award itself substantial performance fees is huge when they have control of the valuation process.”

An EEA spokesman says: “Advisers get concerned about moral hazard when firms hide their charges and when they take performance fees whether they deliver or not. I think a combination of consistency and transparency demonstrates the probity of our fund.”

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. It’s a shame that poor journalism gets in the way of the facts.
    I am sure EEA are big enough to take up their own battle but just for the record, EEA return 8% to their clients and then (and only then) do they divi up any PROFITS over and above that figure 25/75. so if they (EEA) make a gross 12% the investor will get 9% and the 3% will be split between EEA and Viasource.
    Now do the figures if they achieve a 16% return on investments and it still works exceptionally well for the clients, they would get 10% and EEA and Viasource get 3% each.
    Personally all I have to complain about is poor journalism and sour grapes from a competitor to EEA.

  2. John is correct. EEA makes a profit, along with Viasource, but the investor gets paid first and they get paid what they agreed to get paid when they invested. Consistency and transparency are two good things.

    Jeremy Leach (appropriate last name) is spouting off to anyone who will listen these days. Curious if things are catching up to him and his partner Michael Abraham. Remember Shepherds?

    Will

  3. Renee Brown Goodell 13th December 2010 at 7:03 pm

    As a veteran of the asset backed securities world, the key to any investments success or failure is disclosure, disclosure, disclosure. Performance fees are a lengthy second.

    Having seen Real Estate securitizations engage in the same type of fund design over the past two decades, 25/75% splits on profit AFTER the coupon has been paid are not egregious. In fact, one could argue that they keep the Fund Sponsor engaged in the outcome and success of the portfolio.

    When the Fund Sponsor isn’t adequately rewarded on the back end performance and must instead, take fees upfront is when these funds fail. In the scenario above – a 12% over all return results in 9% to the investor and 3% to the Fund sponsor. Not an unjust result.

  4. Not really got a problem with high performance fees, but I do if they’re paid to the same people who calculate the fund value!!!

  5. Dear readers,

    This relates to UK residents and taxpayers only.

    This was a piece of journalism which was hyped to the maximum, however it does still impact all funds in this asset class as onshore custodians and financial managers may need to exit the fund for UK ratings/ compliance reasons.

    The EEA Life Settlements Fund is regulated by the UK, FSA however never been questioned on any matter of misappropriation or toxic asset issue. Far from this it has flourished in the alternative asset arena and held up to 1billion US dollars of assets.

    When any fund becomes under political pressure or face huge withdrawals it needs a great amount of liquidity. The EEA fund does have amazing liquidity on a monthly basis. So would it not be a good idea to look at some of the less than stable rubbish which has been sold onshore to UK RETAIL CLIENTS for many a year.

  6. The EEA proponents here need to be careful – and also note Clive’s comment. The EEA directors paid their associated companies $33m in performance fees in 2011 and then de-valued the fund by 20% in June 2013, bringing the effective return since inception to below 4% pa rather than the 8% pa hurdle rate. The new (lower) valuation will now be used to measure future run-off performance v/v the 8% pa hurdle rate, which will now be easier to achieve. Unearned or undeserved performance fees reduce the cash available for the investors, exacerbating the liquidity issue.

  7. Gary
    The EEA Fund (and its Manager and Administrator) is Regulated by the Guernsey Financial Services Commission, not the FSA. EEA Fund Management Ltd in London is merely the Marketing agent and IS regulated by the FCA

    I disagree with your comment about EEA having “amazing” liquidity on a monthly basis. It does generate approx $50m pa of net income from Maturities, but in 2012 that only added $10m to the year end cash balance of $55m in 2011, although it has gone up to just over $110m at the moment. The policy premiums are currently running at $70m and the Directors have said that they need £140m cash to cover two years of premiums before making any cash available to run-off shareholders. It look as though it will be a long wait. In fact, EEA say that it will take a further five years (even after a two year suspension) before 62% of the remaining 600 policies will have matured.

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