Would you pay 8% in fees for an illiquid alternatives fund?

The fees with Blackstone Group's nontraded fund of hedge funds make 2 and 20 not so bad

Jan 15, 2014 @ 12:01 am

By Jason Kephart

alternatives, fund of funds, hedge funds, fees, blackstone
+ Zoom
(Bloomberg News)

If the thought of paying the classic “two and 20” to a hedge fund makes you queasy, you may want to look away.

Private-equity giant Blackstone Group is soliciting new shares for its $300 million Blackstone Alternative Alpha Fund, which carries a price tag that makes 2% in annual fees and 20% of profits look like a clearance sale. The nontraded fund of hedge funds has all-in annual costs of 8.28%, according to a filing with the Securities and Exchange Commission.

That includes Blackstone's 1.25% management fee, 2.18% of “other” expenses such as investor servicing and custody fees, an ongoing 0.85% distribution fee, and 5.83% of underlying fund fees. That all adds up to more than 10% in fees, but Blackstone has agreed to waive 1.83 percentage points of them.

The average liquid multialternatives fund charges 1.56%, according to Morningstar Inc.

On top of the Alternative Alpha Fund's expense ratio, there is also a 3% sales load and a 2% redemption fee if shares are sold within 12 months of purchase. The fund could therefore cost upwards of 13%, if the shares are sold before one year ended.

It's not that easy to sell shares though. The fund only repurchases shares periodically.

So what do you get for 8% of assets annually and limited liquidity?

A fund of 19 different hedge funds chosen by Blackstone, including 12 long/short equity managers, two global macro managers, two multimanager managers, one managed-futures fund, one credit-driven fund and one event-driven fund. Of course, that mix is subject to change at any time.

The fund has manage to outperform despite its expense-laden head winds. From its launch in April 2012 to the end of last September, the fund gained more than 11%, according to its most recent semiannual report. The Morningstar MSCI Composite AW Hedge Fund Index, an asset-weighted composite of nearly 1,000 hedge funds, had a return of just 5.35% over the same time period.

Still, that doesn't answer the question of whether you get what you pay for.

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