Though much of the financial industry has accepted and instituted stronger compliance and oversight measures following the financial crisis, a recent report from Risk.Net leaves many wondering if the hedge fund industry is on the same page. According to a Corgentum Consulting survey of Operational Due Diligence (ODD) analysts, a large majority of risk professionals indicate that compliance and regulatory issues are the leading risks facing hedge funds today. This was followed by accounting and financial statement reviews, legal issues and business continuity risks.
Changes in financial regulation in the United States and around the world have brought increasing regulatory pressure and oversight to an industry that largely operated under the radar in the past. As a result, many firms have little experience in dealing with the complex rules and requirements of the new oversight practices. And the pressure keeps growing. Approximately 1,500 hedge fund managers were forced to register with the Securities and Exchange Commission in 2012 due to provisions under the Dodd-Frank Act, and along with this registration came increased regulatory burdens. These burdens are also not static and therefore require ongoing monitoring and analysis to ensure that firms stay up-to-date with the compliance practices necessary to avoid significant regulatory penalties.
Adding to the complexity, regulation is not uniform worldwide. In fact, the landscape is dramatically shifting in nearly every geographic environment. This creates a very dynamic environment in which hedge funds must constantly evaluate practices to ensure full compliance with complex and changing rules. The implementation of the European Union’s alternative investment fund managers (AIFM) directive is one such change that will bring significant risk to hedge funds operating in the region. Along with these changes, similar regulatory developments are occurring in some Asian markets. This requirement for cross-jurisdictional compliance in such a dynamic environment adds a significant challenge for traditionally small hedge fund management teams.
Most Hedge Funds Poorly Positioned Today to Deal with Regulatory and Compliance Risks
Due to the organizational realities of most hedge funds, regulatory and compliance management are generally not seen as strengths for most organizations. The small team nature of most firms has generally meant in the past that accountability for compliance has been spread out through the organization, with most individuals responsible for ensuring their segments complied with relevant rules and regulations. In the modern compliance environment, however, this is simply insufficient. Investors are pressuring funds to adopt comprehensive compliance management frameworks, with firms reluctant to change being left behind by proactive managers.
Increased Compliance Represents Opportunity for Job Seekers in the Hedge Fund Industry
As late adopters of integrated compliance frameworks, hedge funds will be actively seeking compliance and risk management professionals in order to get their firms up-to-speed. This issue is of extreme importance, with investors anxious that funds in non-compliance could put themselves in regulatory danger. As a result, financial professionals with experience in compliance and regulatory matters will find themselves in demand over the coming years as hedge funds begin to shift in line with the broader financial industry.