Hedge funds spending big on compliance costs

Overseas hedge fund managers were spending between 5 and 10 per cent of their operating costs to comply with new regulatory environments, with the level of spending required creating barriers to entry for smaller managers entering the market.

Collectively hedge fund managers have already spent more than US$3 billion on compliance costs. The average spend per fund was at least US$700,000 for small fund managers, $6 million for medium-size fund managers and $14 million for large fund managers, according to a survey detailing the cost of regulatory requirements in various markets around the world.

The report, The Cost of Compliance, produced by the Alternative Investment Management Association (AIMA), the Managed Funds Association (MFA) and KPMG International, is based on a world-wide survey of 200 hedge fund managers with $910 billion in assets under management, and was conducted between May and August of this year.

The survey found that smaller hedge fund managers were spending more as a percentage of assets under management and relative to operating costs compared to larger hedge fund managers. One third of smaller managers — that is, those with less than $250 million in asset under management — stated that compliance costs were more than 10 per cent of total operating costs.

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However most managers had chosen to absorb the costs associated with the new compliance regimes and not pass them on to the funds or their underlying investors. North American hedge fund managers report spending more on compliance measures as a percentage of assets under management than those in other regions.

"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," AIMA chief executive Andrew Baker said.