Fund managers now look back on the pre-crisis era in the same nostalgic way as the inhabitants of the Jazz Age once recalled the years before that other, incomparable cataclysm we know as the First World War. In that golden age, a manager could start a fund with $5 million of their own money, answer to and report to no one but investors, and not be surprised to be managing $5 billon within a decade or so. The Business Expense Benchmark survey, first published by Citi Prime Finance in 2012, measures how far the industry has travelled since that innocent period. Today, says the study, it takes assets under management (AuM) of at least $300 million just to cover the overheads (including compliance) out of the management fee alone.
It is 20 per cent higher than a year earlier. It is not hard to find managers who think these figures are too high – some I spoke to recently reckon $100-150 million is a more accurate threshold – but investors and service providers who agree with them are rather harder to locate. Whoever is right, innovators are certainly not going to thrive in an environment in which $3 million is not enough to cover the overheads. Unfortunately, the rising cost of regulatory compliance means it may not be.
Regulation is the major factor behind the rising cost of starting and running a fund. In any other industry, such an obvious brake on new entrants would lead to calls for deregulation. In fund management, however, the Securities and Exchange Commission (SEC), the National Futures Association (NFA), the European Securities and Markets Authority (ESMA) and 28 national “competent authorities” are competing with each other to ask the most of managers.
Form PF, Form CPO-PQR, Annex IV, Open Protocol and reporting of derivatives to trade repositories are already inflating costs without making any compensating contribution to performance, and they are only the start. The Foreign Account Tax Compliance Act (FATCA), Solvency II and the second version of the Markets in Financial Instruments Directive (MiFID II) will all be making a full impact by 2017. Next up is reporting of securities financing transactions to trade repositories.
Of course fund managers are able to master these reporting challenges. Submissions of Form PF, which was among the earliest regulatory demands, are already becoming routine in the United States. But the costs are still real. The purpose of this guide is to contain them, by helping managers understand their responsibilities, and by introducing them to a range of service providers and technology vendors that offer solutions. Our earnest hope is that it fulfils those ambitions.