How Acquired Fund Fees and Expenses Works

Acquired Fund Fees and Expenses (AFFE) describes fees and expenses ascribable to multi-manager and funds-of-funds options. It is now required for fund managers to include "Acquired Fund Fees and Expenses" and fees paid to multiple managers when creating a comprehensive schedule. Acquired Fund Fees and Expenses are an all-around fee comprising the individual fees the investment advisor agrees to pay to the multi-managers. AFFE can range from 0.02% to 10%, depending on the deals with individual managers.

Acquired fund fees and expenses are related to multi-manager and fund-of-funds alternatives with more complex fee structures. These fees improve the total annual costs of a fund and include multiple managers' management fees. A fund of funds is a contributed investment fund, namely a mutual fund or hedge fund that does not pick its investments. However, these FOFs invest in other mutual funds or hedge funds.

In other words, its portfolio contains various underlying portfolios of other funds managed by its portfolio managers. These holdings take the place of any direct investments in assets like bonds, stocks, and other forms of securities. The fund of funds (FOF) strategy aims to attain broad diversification and suitable asset allocation with investments in a range of fund categories wrapped into one portfolio.

Example of Acquired Fund Fees and Expenses

Suppose an investor buys a FOF of $200,000, he must pay two levels of fees. These are management and performance fees. The management fees are always slightly higher, which could be at 4%. At the same time, the performance fees are always lower at 2.5%.

Note that the performance fees are lower than individual mutual funds to indicate that most of the management is assigned to the sub-funds themselves. Hence, an investor would have to pay 8,000 for the management fees and 5,000 for the performance fees.

Mutual Fund Fees and Expenses vs. Acquired Fund Fees and Expenses

Although Mutual Fund Fees and Expenses and Acquired Fund Fees and Expenses seem similar, they are quite different terms.

Mutual Fund Fees and Expenses are charges incurred by investors with mutual funds. The operation of a mutual fund involves cost, shareholder transaction costs, investment advisory fees, and marketing and distribution expenses.

However, Acquired Fund Fees and Expenses outline fees and expenses attributable to underlying funds in a Fund of Fund (FOF). A FOF multi-manager uses AFFE as a line section in documenting the operating costs of underlying funds. As part of the line item, you will find things like management fees (fees and expenses) that multiple managers receive.

History of Acquired Fund Fees and Expenses

Following the provisions of the Investment Company Act of 1940, The Securities and Exchange Commission (SEC) mandated Acquired Fund Fees and Expenses (AFFE). After becoming a requirement in 2007, Acquired Fund Fees and Expenses (AFFE) is a reported item in a Fund of Fund prospectus. Experts claimed Fund of Fund investments to have no expenses and hence reported as zero before 2007.

Before 2007, disclosure was not transparent enough since no expenses were reporting for underlying funds. With AFFE as a requirement, there is transparency enhancement in disclosures. Contained in disclosures are standard costs of a fund, the fund's fee, and other expenses experienced by shareholders.

The Securities and Exchange Commission's (SEC) mandates in the acquired fund fees and expenses rule (AFFE Rule), registered funds such as mutual funds and index funds that invest in other funds, such as business development companies (BDCs), are required. A separate line item includes the title "Acquired Fund Fees and Expenses" (AFFE) in the "Fees and Expenses" table contained in their SEC disclosure documents.