Hedge funds face challenge of mounting compliance costs

Compliance costs are mounting steadily for hedge funds, according to a recent report. 

More than a third of hedge fund managers with less than $250 million in assets under management said compliance requirements consume more than 10 percent of their total operating costs, according to a report produced by KPMG, the Alternative Investment Management Association and the Managed Funds Association. 

The Cost of Compliance report found that the average spend on compliance was at least US$700,000 for small fund managers, $6 million for medium-size fund managers and $14 million for large fund managers.  

The survey of 200 hedge fund managers representing more than $910 billion in assets under management showed that the cost of compliance is creating a heavier burden on smaller firms and could become a barrier to entering the market.  

Smaller firms are spending more, both as a percentage of assets under management and relative to operating costs than larger funds.  

Andrew Baker, CEO of AIMA, said the global survey results 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,” he said.  


Costs generally absorbed  

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. 

“Fund managers around the world are working hard to deal with the challenges of compliance, in terms of capital investments, human resources and time,” said 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.”  

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 U.S., which includes Form PF reporting and Securities and Exchange Commission registration, versus the expected compliance requirements of the soon-to-be implemented EU Alternative Investment Fund Managers Directive. 

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, the report noted.  

More than half of the respondents believe that recent regulation has improved the strength, transparency and reputation of the market and improved investor protection. 


Costs related to regulations 

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 and the Foreign Account Tax Compliance Act were the highest in terms of cost, time and need for external support, which is likely due to their complexity and global reach.  

“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,” said Richard Baker, president and CEO of Managed Funds Association.  

More than two-thirds of the respondents said they needed outside help with AIFMD authorization and reporting; 65 percent needed help with FATCA; 63 percent needed help with their SEC registration and reporting; and 62 percent needed external help with their U.S. Commodity Futures Trading Commission (CFTC) registration and reporting. By comparison, less than 25 percent of respondents said they needed outside help with Asia Pacific registration and reporting. 

The survey was conducted between May and August of this year. 


Andrew Baker