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In a survey released earlier this month, based on responses from more than half of the hedge fund industry, KPMG, the consultancy, set figures for the average costs for these rules: $700,000 for a small fund manager, $6 million for a medium-sized one and $14 million for the largest. Indeed, many of the largest hedge funds have been broadly welcoming of regulation because of the opportunity it may afford for growth in their ability to raise assets.
Since 2008, the industry’s investor base has changed dramatically – shifting from high net worth individuals to institutions such as pension funds and endowments. The industry’s new investors are more conservative in nature and more inclined to invest with managers with proven checks and balances and tough regulatory oversight.
In the US, new provisions in the Dodd-Frank reforms, the largest overhaul of US financial regulation since the 1930s, mean hedge funds must register with the Securities and Exchange Commission for the first time. It is a move some big firms have been clamouring for for years. “We were asking the SEC to register us in 2006", says an executive at one of the biggest hedge funds in the US. “Being registered is a huge comfort to our investors . . . it shows we’re not crooks.”
For smaller hedge fund firms, however, the opportunity is less easily grasped. Big managers can better absorb the costs of new regulations, and attract big money. But small managers may not survive to do so.
For all hedge funds, though, perhaps the most defining characteristic on new regulation and its impact growth is its inescapability. Europe’s AIFMD contains provisions that must be applied by any fund manager, no matter where they are based, if they take a penny from an EU-based investor. Switzerland was forced to create its own hedge fund laws to bring itself into line with the EU as a result. The US too, has been deft at applying an extraterritorial regime of hedge fund regulation. Fatca, the foreign account tax compliance act, requires all non-US hedge funds to report information on their clients.
For better or worse, a more heavily regulated hedge fund industry is here to stay – growth in assets may not dip, but growth in profitability may have to.
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