Schroders in fee dispute with its own hedge fund

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The Independent Online

Schroders is in dispute with its own hedge fund over the fees it is being charged by the fund for holding millions of pounds in cash.

The FTSE-listed fund manager is negotiating with New Finance Capital (NFC), its fund of funds, over fees that it is paying on cash being held in what is called a "side-pocket".

One source close to Schroders said: "What makes us angry is that the hedge fund is charging our clients even though the money is not even being invested but is in cash.

"This practice of keeping a side-pocket and charging fees is giving the hedge fund industry a bad reputation. It is money which belongs to Schroders' client and it is not earning anything, so there is no reason that NFC should be charging so much."

Schroders has asked NFC to liquidate certain investments made through its funds because of poor market conditions. But only 90 per cent of the money that Schroders invested was returned because NFC, which invests in the credit and commodity markets among other asset classes, has retained a 10 per cent balance in the side-pocket.

NFC has held on to the money because it did not want to sell assets at distressed prices in today's markets. But Schroders is arguing that NFC, run by Marc Hotimsky, should not charge such high fees on the 10 per cent balance, which is producing little, if no returns on the cash.

NFC is understood to have lowered its fees charged to Schroders to around half a per cent, from 2 per cent.

The source added: "It is not just Schroders which is worried by this trend. Fund managers all over the City are trying to get their money out of hedge funds because it's being kept in cash and fees are still being charged. Schroders should be supported in making this stand."

But a spokesman for tbhe fund manager said: "Schroders owns NFC so it can tell it to do what it wants."

He admitted that there is one Schroders investor who is demanding his money back. "He doesn't want to pay the fees on the cash which has not yet been returned. But he does not have very much invested."

The Alternative Investment Management Association (AIMA), which represents the hedge fund industry, is said to be aware of the growing use of side-pockets and is looking into the practice.

Schroders, which has £114bn under management, is due to report results this Thursday that will show how badly the downturn has affected its performance. Broker Charles Stanley, forecasts that profit will be down to around £272m for last year, compared with £392m in 2007.

Shares in Schroders closed down 3 per cent on Friday at 755p.