Acquired Fund Fees and Expenses (AFFE)

Demystifying Acquired Fund Fees and Expenses (AFFE): What Investors Need to Know

Investing in funds of funds (FOF) can seem complex, especially when it comes to understanding the fees involved. Acquired fund fees and expenses (AFFE) shed light on these expenses, revealing how much investors are paying in management fees to the underlying funds. Let's dive deeper into AFFE to demystify its significance for investors.

Unraveling the Concept of Acquired Fund Fees and Expenses

AFFE is a critical component in the world of multi-manager and fund-of-funds investments. These fees represent the operating expenses associated with the underlying funds within an FOF structure. This inclusion became mandatory in fund prospectuses as of January 2007, providing investors with greater transparency regarding the total costs of their investments.

Understanding AFFE involves grasping the intricacies of multi-manager investment strategies. Unlike traditional funds, FOFs invest in other mutual funds or hedge funds, aiming to achieve diversification and asset allocation across various fund categories. Consequently, investors in FOFs face a layered fee structure, encompassing management fees paid to multiple managers.

Regulatory Landscape: SEC Mandates and Disclosure Requirements

The Securities and Exchange Commission (SEC) played a pivotal role in enhancing transparency around AFFE. In 2007, the SEC introduced provisions to the Investment Company Act of 1940, facilitating the registration of fund-of-funds options. These provisions mandated detailed disclosure of expenses, including AFFE, in fund prospectuses.

Prior to these regulatory changes, fund-of-funds investing lacked transparent disclosure, often misleading investors with zero reported expense ratios. The introduction of AFFE requirements addressed this issue, providing shareholders with a clearer understanding of the combined expenses incurred.

Case Study: Neuberger Berman Absolute Return Multi-Manager Fund

The Neuberger Berman Absolute Return Multi-Manager Fund offers a tangible example of fee structuring within multi-manager funds. This open-end mutual fund encompasses various share classes, each subject to distinct fee arrangements.

Management fees for the fund range from 1.81% to 1.92%, with additional distribution fees applicable to certain share classes. Total other operating expenses, including AFFE, contribute to the overall cost structure of the fund, offering investors a comprehensive view of the expenses involved.

In essence, AFFE serves as a crucial metric for investors navigating the complexities of multi-manager investments, enabling informed decision-making and greater transparency in fee structures.