Hedge funds, like most other financial institutions, are facing increased regulations in the wake of the financial crisis, but according to a survey by KPMG International and Alternative Investment Management Association (AIMA), European regulations are the most complex and expensive, and fund managers operating in the EU are worried that it could make them less competitive.
“In Europe, the implementation doesn’t seem to have been well thought out,” said one of the surveyed fund managers. “It’s making Europe seem like a less attractive place to invest, particularly when you look at the U.S. where there is a very coordinated approach.”
Hedge funds included in survey
KPMG’s survey, which included over 200 hedge funds with a combined $910 billion in assets under management, found that the EU’s Alternative Investment Fund Managers Directive (AIFMD) authorization and reporting process was ranked as having a high cost more often than any other regulatory process, with SEC registration and reporting coming in second.
There is a sense that the SEC is working with managers to make compliance less daunting. “The SEC has tried to be as helpful and productive as possible in the fulfillment of their congressional mandate,” said one U.S.-based fund manager in the survey, but that doesn’t seem to be true of the AIFMD. Part of hedge fund managers’ concern is that the EU regulation affects any fund that offers services to EU citizens, not just those that are domiciled in the EU. For a hedge fund based in the U.S. or Asia, that means complying with multiple sets of regulations. This isn’t just more expensive, it makes operations significantly more complex.
Cost of compliance
KPMG estimates that the total cost of compliance is about $3 billion industry-wide, and most managers expect it to go up. So far, the managers have taken on between 79 and 100 percent of those costs, but there is a limit to how far they can let regulations cut into margins, and if they have to increase fees investors may decide to take their money elsewhere. It’s a tough spot that managers expect to find themselves in within a few years. As is usually the case with compliance, smaller funds are getting hit hardest because they have to spend more relative to their AUM to get things right, creating another barrier to entry and possibly keeping new funds from starting up.