Securities Lawyers Blog
From January 2003 through the end of 2012, Morgan Stanley enticed over 30,000 customers to invest $797 million collectively into a managed-futures fund called Morgan Stanley Smith Barney Spectrum Technical L.P. The prospectus for Spectrum Technical fund characterized the fund as potentially profitable “when traditional markets are experiencing losses” and recommended the fund as a way to diversify beyond traditional stocks and bonds. The prospectus boasted that over a twenty-three year period, people who invested ten percent of their assets in managed futures outperformed portfolios comprised only of stocks and bonds.
The Spectrum Technical fund earned $490.3 million in trading gains and money-market interest income from 2003 through 2012. However, investors who remained in the fund during this period did not receive any of the returns because the commissions, expenses, and fees paid to fund managers and Morgan Stanley totaled $498.7 million. Thus, Spectrum Technical investors lost $8.3 million simply because the fees charged to the fund were greater than the gains.
Morgan Stanley advertised to clients that its managed futures funds performed well when the stock market was hit hard in 2000 and late 2007 and even gained 22.5 percent after fees in 2008. The firm further stated that it only sells these funds to qualified investors, and that it clearly defines the risks and fees for customers. Although these disclosures may provide insight as to the effect of fees on investor gains, information regarding fund managers’ conflicts of interest is often buried deep in the fund’s prospectus or regulatory filings.