A New Regime

The regulatory climate for hedge funds

Originally published in the December 2008/January 2009 issue

Hedge fund managers anticipate increased regulation under the new presidential administration with the majority of senior partners at US firms expecting rising compliance costs making hedge funds more costly to operate. Over 98% of senior hedge fund managers reported that the new US presidential administration is likely to increase regulation of the hedge fund industry, according to the survey.

An overwhelming majority also suggested that associated compliance costs will make hedge funds more costly to operate, with over 80% of respondents in agreement. While just over 75% of participants suggest that the overall impact of the new administration will be negative, most reported that increased regulation will not lead to more fund closures or fewer start-ups. It’s a generally accepted behavioural concept that uncertainty creates negative emotions. The financial services industry in particular has always been leery of the unknown, as uncertainty magnifies risk. Consequently, we expected our findings to show a degree of scepticism regarding the new administration and its regulatory agenda. The election’s focus on the economy left many with the impression that regulatory reform will be a priority for the new regime. While the scope of these efforts is not yet defined, it is apparent that the hedge fund industry believes that regulatory action is on the horizon.

The survey was based on telephone interviews with 313 hedge fund senior partners at US-based hedge fund organisations. Participating firms were segmented by assets under management. Slightly over 70% of the participants reported assets under management between US$100 million and US$750 million. Nearly 30% of firms reported assets under management in excess of US$750 million. Among notable findings:

• Over 98% of hedge fund managers believe that the new administration is likely to increase regulation of the hedge fund industry. Areas where increased regulation is expected:

– Asset Valuations 84%
– Counterparty Risk 84%
– Capital Raising 80.8%
– Transparency 77.3%

• Nearly 77% of respondents agreed that the overall impact of the new administration on the hedge fund industry will not be positive.

• Under half of participants indicated that increased regulation would impact capital raising efforts.

• Nearly 84% of hedge fund managers believe that regulatory compliance costs will make hedge funds more costly to operate.
Though hedge fund managers readily acknowledge that a more restrictive regulatory environment looms, the industry seems well-positioned to meet the demands of increased compliance. Despite the fact that nearly 84% of participants believe that compliance costs will make funds more costly to operate, fewer than seven percent expect that this will lead to increased costs to investors. Moreover, based on the research, it does not appear that the impact of increased regulation will impede fund launches or accelerate closures. Fewer than six percent of participants agreed that compliance costs will lead to more closures, with a similar percentage reporting that there will be fewer start-ups due to increased regulation.




Research for “A New Regime,” which examined the evolving regulatory environment for alternative investment firms, was conducted by Russ Alan Prince and Hannah Shaw Grove


Howard Altman is a co-Managing Principal and the principal-in-charge of financial services at Rothstein Kass