Softing aka Soft Dollar Standards reduce investment returns
I was reading chapter 19 of Lars Kroijer’s new book, Money Mavericks: Confessions of a Hedge Fund Manager on IndexUniverse.eu earlier today and I couldn’t stop thinking about CFA Institute Code of Ethics & Standards of Professional Conduct.
The Ethics section of CFA Level 2 curriculum has a whole chapter dedicated to Soft Dollar Standards… first, here is the definition:
Soft dollar arrangement refers to the research and benefits reimbursed to the client or the client’s manager by the broker for directing the trade to the broker
Now to bring this into context – Lars’ chapter neatly breaks down the layers fees an investor will incur when invested in a fund of hedge funds through his/her pension fund…
Back to Soft Dollar Standards or softing as referred by Lars …
Even though Lars assume none, he goes on to explain the concept and how it affects investor returns:
…In some cases at least until a couple of years ago, hedge-fund managers also engaged in “softing”. This is when a broker charges you more than the going rate for at trade (say 0.2% instead of 0.1%) and gives part of this difference back to you in the form of things like a Bloomberg terminal, computers, etc. This effectively causes the hedge fund to charge its investors higher fees. In line with Holte Capital, this example assumes there is no “softing” going on (as if we did not charge people enough already!).
If you are care to know why you haven’t seen the spectacular returns promised by hedge funds, go read the full article