A global survey of hedge fund managers reveals that they are making significant investments in their firms' infrastructure to comply with new regulatory requirements.
According to The Cost of Compliance , a new report produced by KPMG International, the Alternative Investment Management Association (AIMA) and the Managed Funds Association (MFA), the average spend on compliance was at least (US)USD700,000 for small fund managers, USD6 million for medium-size fund managers, and USD14 million for large fund managers.
The survey, which is one of the largest global surveys of hedge fund managers, was conducted between May and August of this year and includes the views of 200 hedge fund managers representing more than USD910 billion in assets under management (AUM). It also included in-depth interviews with managers from North America, Europe and Asia.
The study found that the hedge fund industry has already invested heavily in compliance efforts to meet new global regulations, having spent more than USD3 billion to date on compliance costs. Hedge fund managers were found to be spending anywhere between 5 per cent and upwards of 10 per cent of their operating costs on compliance technology, headcount and strategy.
The survey found that the cost of compliance is creating a heavier burden on smaller firms and could become a barrier to entering the market. The smaller firms are spending more -- both as a percentage of AUM and relative to operating costs-- than their larger counterparts. In fact, more than a third of hedge fund managers polled with less than USD250 million in assets under management (AUM) said compliance requirements consume more than 10 per cent of their total operating costs.
The survey also found that overwhelmingly, managers are shouldering the majority of the costs associated with compliance, and not passing them on to the funds.
The survey provides an inside look at how the industry is responding to the new regulatory requirements.
"Fund managers around the world are working hard to deal with the challenges of compliance, in terms of capital investments, human resources and time," says Rob Mirsky, lead partner for KPMG's global hedge fund practice. "But there is a sense that the investments they are making today will pay off in the future from a competitive standpoint.”
"The results of this global survey show the industry is serious about building its operational infrastructure for regulatory compliance. But it is important that regulation does not raise barriers to entry to the industry. Next generation managers are an important source of new ideas and talent," said Andrew Baker, CEO of AIMA.
"This study demonstrates our industry's tremendous commitment to a new era of regulation. In supporting the goals of global financial reform, and reinforcing that support with these investments in compliance, the industry has acted as a willing partner with regulators and policy makers in creating safer, more stable, and efficient markets for investors," says Richard H Baker, President and CEO of Managed Funds Association.
North American firms report spending more on compliance measures as a percentage of AUM than those in other regions. In part, this likely reflects the already high compliance requirements in the US, which includes Form PF reporting and SEC registration, versus the expected compliance requirements of the soon-to-be implemented AIFMD.
The addition of new resources and sharpening of focus on regulatory compliance and risk management suggests that hedge fund managers around the world are committed to meeting regulatory requirements as well as the increased demands of institutional investors.
More than half of the respondents believe that recent regulation has improved the strength, transparency and reputation of the market and improved investor protection.
Managers said their compliance costs and the need to outsource are directly related to the complexity of the regulations. The Alternative Investment Fund Managers Directive (AIFMD) and the Foreign Account Tax Compliance Act (FATCA) were the highest in terms of cost, time and need for external support, which is likely due to their complexity and global reach.
More than two-thirds of the respondents said they needed outside help with AIFMD authorisation and reporting; 65 per cent needed help with FATCA; 63 per cent needed help with their SEC registration and reporting; and 62 per cent needed external help with their US Commodity Futures Trading Commission (CFTC) registration and reporting. By comparison, less than 25 per cent of respondents said they needed outside help with Asia Pacific registration and reporting.