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FTADVISER BLOG

Funds must offer Libor refund

Has the investment industry been inadvertently overcharging in light of the Libor scandal?

By Nick Reeve | Published Jul 16, 2012 | comments

We cannot ignore the Libor rate-fixing scandal however long it takes to resolve, its effects could go far beyond a few traders’ desks being cleared and the odd criminal charge.

Advisers can be forgiven for finding it all a bit Li-boring – after all, the media has been banker-bashing for years, and the adviser industry has bigger fish to fry with the RDR looming.

But the mere idea that Libor may have been manipulated does present the investment industry with a massive conundrum. Has it been inadvertently overcharging?

Performance fees and absolute return funds are both controversial enough within investments already, without questions over the suitability of their benchmarks as well.

For years absolute return funds have benchmarked themselves against Libor, and many have charged performance fees based on the outperformance of this rate. If it was successfully kept artificially low by bank traders to aid their positions, there is a strong case for performance fees to be refunded in some form.

Fund managers will protest – some already have – that it was out of their control. Libor is a widely-used benchmark and trillions of pounds’ worth of contracts rely on it, so why not the odd absolute return fund?

Richard Saunders, chief executive of the Investment Management Association, has already described unravelling the effects of any Libor manipulation as “mind-bendingly complex”.

So instead of waiting months and maybe years to calculate the full effect of Libor suppression, fund managers should be prepared to refund or temporarily suspend performance fees in the case of Libor-based funds in a goodwill gesture to investors and advisers.

We may never know exactly how much of an impact the Libor saga has had on investments and the wider financial world. But fund managers have it in their power to draw a line under it and wash their hands of any possible criticism.

Nick Reeve is senior news reporter at Investment Adviser

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