Hedge fund managers revealed they are making significant investments in their firms’ infrastructure to comply with new regulatory requirements, according to a survey by KPMG International, the Alternative Investment Management Association (AIMA) and the Managed Funds Association (MFA).
The poll found the average spend on compliance was at least $700,000 for small fund managers, $6 million for medium fund managers, and $14 million for large fund managers.
Key implications for the Canadian hedge fund industry:
- Investments being made in compliance efforts: The global hedge fund industry has already spent more than $3 billion (USD) to date on compliance costs. Hedge fund managers were found to be spending anywhere between 5% to 10% of their operating costs on compliance technology, headcount and strategy.
- Smaller firms carry the burden: The cost of compliance is creating a heavier burden on smaller firms and could become a barrier to entering the market. The smaller firms are spending more – both as a percentage of AUM and relative to operating costs – than their larger counterparts.
- Smaller funds are spending a considerable percentage of the fees they earn on compliance – in North America the cost is 40 bps of AUM.
- Overwhelmingly, managers are shouldering the majority of the costs associated with compliance, and not passing them on to the funds.
- More than a third of global hedge fund managers with less than $250 million in AUM said compliance requirements consume more than 10% of their total operating costs.
- Complexity of regulations create need to outsource: More than two-thirds of the respondents said they needed outside help with Alternative Investment Fund Managers Directive (AIFMD) authorization and reporting; 65% needed help with Foreign Account Tax Compliance Act (FATCA); 63% needed help with their Securities and Exchange Commission (SEC) registration and reporting; and 62% needed external help with their US Commodity Futures Trading Commission (CFTC) registration and reporting.
- The AIFMD and the FATCA were the highest in terms of cost, time and need for external support, which is likely due to their complexity and global reach.