This is not a question that you can answer without any background. Theoretically, a fund can directly pay a fund’s office expenses. It’s just that most investors do not expect to pay for a manager’s office expenses. Investors expect the management fee they pay to cover those expenses, with the rest as profit for the manager.
The key is what the fund documentation says. Generally you will see something like this is the partnership agreement:
The Partnership bears all of the expenses incurred by it or by others on its behalf or for its benefit, including ordinary operational and administrative expenses, expenses incurred in connection with the continuing offering of the Interests, expenses incurred in direct or indirect investment activities, financing and transaction costs, interest expenses on funds borrowed on its behalf, and extraordinary expenses, if any.
This provision came from the partnership agreement for Alpha Titans. That firm got in trouble with the Securities and Exchange Commission for using fund assets to pay more than $450,000 in office rent, employee salaries and benefits, and similar expenses. Alpha Titans was in violation of its fund documents.
In addition to the LP Agreement, the Form ADV should have also disclosed that the investors would be paying these operating expenses.
Finally, Alpha Titans financial statements failed to meet GAAP standards since the statements omitted the disclosure of these operating expenses. They should have disclosed the expenses and related party transactions. The funds were relying on the financial statement delivery option for funds under the Custody Rule. Since the financial statements failed to meet GAAP standards, they were inadequate for Custody Rule compliance, and therefore Alpha Titans failed to comply with the Custody Rule.
That is 1,2,3 punch from the SEC for expense allocation failures.
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