Managers not offsetting regulatory compliance costs, says survey
The majority of hedge funds are not offsetting the costs of regulatory compliance to their funds, while smaller managers are being disproportionately impacted by the rule changes, according to a joint survey by AIMA, the Managed Funds Association (MFA) and KPMG of 200 managers globally running in excess of $910 billion in Assets under Management (AuM).
The study – The Cost of Compliance - found the average spend on compliance varied between $700,000 at smaller hedge funds to $14 million at the larger players. These compliance costs are placing heavy burdens on smaller firms and leading to a higher barrier to entering the market. The study said more than a third of managers running less than $250 million said their compliance spend accounted for over 10% of their total operating costs.
Andrew Baker, CEO at AIMA, warned excessive regulation could have unintended consequences. “It is important that regulation does not raise barriers to entry to the industry. The next generation managers are an important source of new ideas and talent,” he said.
A study by Citi Prime Finance published in December 2012 estimated sub $250 million hedge funds were spending roughly 198 basis points of their 2% management fee on operations and third party service provider costs alone.
The AIMA/MFA/KPMG study added hedge funds worldwide had spent more than $3 billion on compliance costs, a figure that may seem surprisingly low to some industry experts.
The survey also highlighted North American firms spent more on compliance measures in comparison to their peers elsewhere, although this is attributable to regulatory reporting initiatives such as Form PF with the Securities and Exchange Commission (SEC) and Form CPO-PQR with the Commodity Futures Trading Commission (CFTC) having already been implemented whereas AIFMD is yet to be finalised.
The majority of managers are outsourcing compliance with two thirds of respondents acknowledging they needed outside help with AIFMD authorisation and reporting; 63% confirmed they had external assistance with FATCA compliance, while 63% and 62% required support with SEC and CFTC registration and reporting respectively. However, just 25% said they needed outside help with Asia-Pacific registration and reporting.
The workload at hedge funds has increased exponentially since the onslaught of global regulations. A Deutsche Bank Markets Prime Finance survey of 44 hedge fund chief operating officers (COOs) with a collective AuM of $325 billion in the US and Europe, said almost a quarter of US-based COOs and 13% of European COOs were devoting 75% more time dealing with regulatory issues. That same study said the average COO spent 50% more time handling compliance, legal and regulatory issues.
Despite the added costs, more than half of all respondents to the joint AIMA, MFA and KPMG study said regulation had improved the strength, transparency and reputation of the market and had bolstered investor protection.
“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 policymakers in creating safer, more stable and efficient markets for investors,” commented Richard Baker, CEO at the MFA in Washington DC.