The $126 million Grant Park Managed Futures Fund (GPFAX) has changed the way it invests, 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.
Other such funds have the ability to do the same, she said.
The Grant Park Fund, like about half the 35 managed-futures funds available, is a fund of commodity trading advisers, which manage commodity futures.
Knollwood executives say they're not hiding fees from investors; instead they call it an “accounting” issue.
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.
"We're trying to deliver the return stream of the best of breed managers," said Patrick Meehan, chief operating officer of Knollwood. "This is the best way to access that return stream."
The fund is taking on the extra cost of paying for the swap agreement and more counter-party risk, said Ms. Papagiannis
"We've gotten feedback from regulators and are using what we think are best practices," said Andrew Rogers, chief executive of Gemini Fund Services LLC, administrator of Grant Park Managed Futures Fund.
The fund isn't likely to be the only managed-futures fund to make the switch to swap agreements to shelter some of its management costs.
“The vast majority of these funds are leaning toward it,” said Aisha Hunt, partner in the financial services practice at Dechert LLP.
The funds have also struggled with performance since the financial crisis. Because they employ trend-following strategies, the funds have suffered in the macro-driven, risk-on, risk-off environment that has 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%.
Regardless, the category continues to attract dollars, though flows have slowed tremendously. The funds had $652 million of inflows year-to-date through October, compared with $3.2 billion of inflows for all of last year, according to Morningstar.
For two straight years, advisers have ranked managed futures the strategy they were most likely to add, according to Morningstar & Barron's Alternative Investment Survey.
Managed-futures funds have the financial crash to thank for their staying power, as it was then that the strategies' diversification benefits were most apparent.