NEW YORK ( TheStreet) -- If you think the "2 and 20" fee structure of most hedge funds is astronomical, then wait until you hear about the "1 and 37" structure of Alerian MLP ETF ( AMLP).

The "2 and 20" structure refers to fees and expenses computed from 2% of the assets and 20% of the profits. For AMLP, the fees and expenses are 0.85% of the assets and about 37% of the profits.

After two months of operation, the Alerian MLP ETF has already incurred expenses of more than 4%. This translates to an annualized rate of 24%, almost double the 12.5% of MacroShares Major Metro Housing, the former record holder of the most outrageous expense ratio.

The Alerian MLP ETF has a stated objective: "The Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of its underlying index, the Alerian MLP Infrastructure Index."

The following five data points are taken directly from the performance page of the AMLP Website :
  • Total Operating Expenses 0.85%
  • Alerian MLP ETF gain for September = +3.42%
  • Alerian MLP Infrastructure Index gain for September = +5.70%
  • Alerian MLP ETF gain for October = +3.17%
  • Alerian MLP Infrastructure Index gain for October = +4.99%

Now, let's do the math. Since AMLP says it will track the underlying index minus fees and expenses, the performance difference must then be equal to those fees and expenses.

Therefore, the total operating expenses were 2.28% (5.70% - 3.42%) for the month of September 2010 and 1.82% (4.99% - 3.17%) for October.

For its first two full calendar months of operation, total expenses have been 4.1%. In other words, the fund has already surpassed its total annual expense ratio by more than four times. If this pace continues for a full year, shareholders in AMLP could be looking at an expense ratio of 24.6%.

Why is this happening? It's because AMLP, based on my research, is structurally different than every other ETF and ETN (all 1,067 of them) listed for trading on U.S. exchanges.

It's because AMLP is not a "pass through" entity. Instead, AMLP is a corporation and is obligated to pay federal income at the corporate rate of 35% and will likely also have to pay some state taxes. It's because AMLP is making its shareholders pay that tax obligation.

How are they doing that? They refer to it as their "secret", but it's really quite simple. AMLP is clipping about 37.5% of each day's gain/loss in the underlying index to pay those taxes. This was verified by both Alerian and ALPS (the fund's distributor).

However, I couldn't find this fact in the prospectus or any of the small print disclosures, and certainly not in any of the marketing materials.

The closest I could find is "As a result, the Fund's after tax performance could differ significantly from the Index even if the pretax performance of the Fund and the performance of the Index are closely correlated." Sure seems a little obtuse to me.

It's time that shareholders are told the truth. They need to know that the expense ratio is nowhere close to being 0.85%, even if that additional 37.5% goes to Uncle Sam. They need to be told why.

They need to know that AMLP is not a tax efficient investment because shareholders are paying those 35% corporate taxes. They need to have the outrageous "1 and 37″ fee and expense structure explained to them.

Disclosure for this article: At the time of publication Ron Rowland had no positions in any of the securities, companies, or ETF sponsors mentioned, and receives no income, revenue, or other compensation (either directly or indirectly) from, or on behalf of, any of the companies or ETF sponsors mentioned.
Ron Rowland is the founder and president of Capital Cities Asset Management, a fee-based registered investment adviser in Austin, Texas. He is also the founder and publisher of Invest With An Edge and All Star Investor, where he has been providing market commentary and active investment advice since 1991. Opinions expressed in this article should not be considered personal recommendations to buy or sell any security.