Hedge fund managers revealed they are making significant investments in their firms’ infrastructure to comply with new regulatory requirements, according to The Cost of Compliance, a report produced by KPMG International, the Alternative Investment Management Association (AIMA) and the Managed Funds Association (MFA), in 2013.
One of the largest global surveys of hedge fund managers, it includes the views of 200 hedge fund managers representing more than $910 billion (USD) in assets under management (AUM). The survey 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 per cent 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 Assets Under Management.
- 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 per cent 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 per cent needed help with Foreign Account Tax Compliance Act (FATCA); 63 per cent needed help with their Securities and Exchange Commission (SEC) registration and reporting; and 62 per cent 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.
Many believe that recent regulation has improved the strength, transparency and reputation of the market and improved investor protection. This survey shows that hedge fund managers are committed to meeting regulatory requirements and the increased demands of institutional investors.
“Fund managers are working hard to deal with the challenges of compliance, in terms of capital investments, human resources and time. In Canada particularly, we have seen the cost of compliance continue to rise as managers are subject to a high level of regulation, especially as far-reaching global regulation, such as Dodd-Frank, FATCA and AIFMD finds its way across the border.”
– Peter Hayes, Partner and National Director, Alternative Investments, KPMG
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About the survey
The survey, which is one of the largest global surveys of hedge fund managers, was conducted between May and August of 2013 and includes the views of 200 hedge fund managers representing more than $910 billion in AUM. It also included in-depth interviews with managers from North America, Europe and Asia.
KPMG LLP, an Audit, Tax and Advisory firm (kpmg.ca) and a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm of KPMG International Cooperative (“KPMG International”). KPMG member firms around the world have 155,000 professionals, in 155 countries.
The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss entity. Each KPMG firm is a legally distinct and separate entity, and describes itself as such.
As the global hedge fund association, the Alternative Investment Management Association (AIMA) has over 1,300 corporate members (with over 7,000 individual contacts) worldwide, based in over 50 countries. Members include hedge fund managers, fund of hedge funds managers, prime brokers, legal and accounting firms, investors, fund administrators and independent fund directors. They all benefit from AIMA’s active influence in policy development, its leadership in industry initiatives, including education and sound practice manuals, and its excellent reputation with regulators worldwide.
AIMA is a dynamic organisation that reflects its members’ interests and provides them with a vibrant global network. AIMA is committed to developing industry skills and education standards and is a co-founder of the Chartered Alternative Investment Analyst designation (CAIA) – the industry’s first and only specialised educational standard for alternative investment specialists. For further information, please visit AIMA’s website, www.aima.org.
The Managed Funds Association (MFA) represents the global alternative investment industry and its investors by advocating for sound industry practices and public policies that foster efficient, transparent, and fair capital markets. MFA, based in Washington, DC, is an advocacy, education, and communications organization established to enable hedge fund and managed futures firms in the alternative investment industry to participate in public policy discourse, share best practices and learn from peers, and communicate the industry’s contributions to the global economy. MFA members help pension plans, university endowments, charitable organizations, qualified individuals and other institutional investors to diversify their investments, manage risk, and generate attractive returns. MFA has cultivated a global membership and actively engages with regulators and policy makers in Asia, Europe, the Americas, Australia and all other regions where MFA members are market participants.
For more information, please visit: www.managedfunds.org.
National Manager, Communications
KPMG in Canada
416 777 3988