The rising cost of compliance is hitting small hedge funds harder than large ones and may discourage the creation of new funds, according to a study by KPMG.
More than a third of funds with total assets under management (AUM) of less than $250 mn are spending more than 10 percent of their operating costs on compliance, according to the study, co-sponsored by the Alternative Investment Management Association (AIMA) and the Managed Funds Association.
No fund with AUM of more than $5 bn spends more than 10 percent of operating costs on compliance, while only 14 percent of funds with AUM of between $1 bn and $5 bn are spending that much. Overall, 64 percent of funds are spending about 5 percent or more of their operating costs on compliance.
‘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,’ says Andrew Baker, CEO of AIMA, in a press release. ‘Next-generation managers are an important source of new ideas and talent.’
About 89 percent of hedge fund managers expect the cost of compliance to increase in coming years while 10 percent estimate the cost will stay the same as it is now. In almost all cases, hedge funds are shouldering the costs of compliance themselves, and not passing them on to clients, the study notes.
On average, small funds spend at least $700,000 a year on compliance while medium-sized funds spend $6 mn or more and large funds upward of $14 mn. Hedge fund managers have spent a total of $3 bn on compliance costs to date, the study concludes.
Respondents to the survey, conducted between May and August of this year, include 200 hedge fund managers in North America, Europe and Asia with total AUM of $910 bn.
