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.”