While the global hedge fund industry is making significant changes, both operationally and culturally, to accommodate growing investor demand for transparency and due diligence, additional changes are being forced by the industry’s dramatically changing regulatory environment.
Globally, regulators have been working toward a G20 agenda of introducing new registration and reporting rules for hedge fund managers, with the Alternative Investment Fund Managers Directive (AIFMD) in the European Union and the Dodd-Frank Wall Street Reform and Consumer Protection Act in the United States both seeking to increase the flow of information from managers to supervisors. Changes to the regulations around short-selling and over-the-counter derivatives clearing has also significantly impacted hedge fund managers and the wide-reaching Foreign Account Tax Compliance Act (FATCA) in the United States is likely to pose particular problems.
As the survey results demonstrate, regardless of fund size, nine out of 10 respondents reported an increased demand for regulatory compliance by investors. Overall, eight of each of these nine respondents reported that they had to increase employee headcount in order to accommodate this demand. In addition, seven of each of these eight respondents reported that despite the increased demand, no more than two people had to be hired to accommodate this request.
Going forward, the survey found that overall, 45% of hedge fund managers were expecting to make further increases in headcount over the next two years in the area of regulatory compliance. As is illustrated in the accompanying chart, this figure was relatively consistent across hedge fund sizes as measured by both assets and employee size, ranging from a low of 41% to a high of 50%. These findings indicate that managers expect the pressures associated with regulatory change to continue for the foreseeable future.