Across the financial industry, regulation has become the name of the game as officials attempt to reign in risk-taking activities that led to the financial crisis. Unfortunately for the financial industry, much of the regulation is being driven by politics and public opinion, which can be dangerous in a complex environment that is not always understood. Most member of the general public would be unable to distinguish between a hedge fund and a private equity firm, yet these same people are the voters that elect politicians. As a result, many regulations are the result of politicians attempting to look as though they are cracking down on risk taking, when in reality the policies could have unforeseen consequences. In many cases, risk is shifted offshore away from the prying eyes of regulators, which actually may pose a more significant risk to the financial system as a whole.
Impact of Regulation is Global
The question of increased regulation is not only a relevant topic in the United States, but throughout most countries and regions with a developed financial system. Europeans have also recently discussed reforming hedge funds, and more strict controls over such funds in Asia are likely to follow in the near future. This has made the global hedge fund landscape very complex, with most managers uncertain about jurisdictional complexities that impact both their operations and their investor’s ability to efficiently place money with their funds.
Trust is at the Heart of the Debate
Trust of the financial system by the general public has been a core issue in the debate around financial system regulation over the last several years. One issue at the heart of the debate about trust is the exclusiveness of hedge funds, which raises unique issues and concerns. The general public feels separated from this asset class, in that they are generally ineligible to invest their own savings in a hedge fund unless they are high wealth accredited investors. Such funds are then viewed as some privileged secret, designed to take advantage of markets to benefit the rich exclusively. Media coverage indicating the nature of some of the bets made by hedge funds, such as taking positions betting on sovereign nations defaulting, certainly does not help the case in the eyes of the public.
Impacts on Hedge Funds are Very Real
Increasing regulation is not only an academic discussion. The impacts of increased oversight and compliance requirements weigh heavily on fund overhead costs, which then must be passed on to the investor in fees. Unfortunately for hedge funds, fee pressures remain high, due to competition from alternative products that don’t face the same regulatory pressures as well as other hedge funds domiciled in jurisdictions without strenuous rules. Often, hedge funds are forced to look internally for cost reductions in order to cover increasing compliance expenses, and that often means job cuts. Those working in the hedge fund industry should pay close attention to the developing regulatory landscape, as it will have a profound impact on where job growth occurs, and what future jobs look like.