One of our clients sent us a note recently, which stated that one of their clients told them there is a “standard to report alternative investments as net-of-fee, and to combine these with gross-of-fee returns.” This “standard” apparently is not in writing, so perhaps the term was being used a bit loosely? Perhaps “a common practice” (although how common this is is open to debate) or “best practice” (though I would think it’s not “best”) might have been a better choice of words. In general I think “standards” should be written down somewhere; this is an example of one that isn’t, though it’s still worth discussing.

Mixing assets with net-of-fee returns with assets with gross-of-fee returns is never a good idea: what do you end up with? A hybrid, where you cannot make much sense out of what is being shown. If there is a “standard” (though again, it’s probably a “best practice”) it would be to not combine net-of-fee return assets with gross-of-fee, unless you have no choice. An example of how this used to be the case: in the early days of the AIMR-PPS(R), many U.S. firms included mutual funds in their composite, where the funds had net-of-fee returns (because at that time, firms were prohibited from “grossing-up” the fund returns) and separate accounts had gross-of-fee returns. The result was a composite gross-of-fee return that was lower than it would have been (had the fund been grossed-up). In 1996, the SEC issued a “no-action letter” which allowed firms to gross-up fund returns, so this is no longer a problem.

There are loads of things that mix well together, but net- and gross-of-fee returns aren’t two of them.