Over the past several years, large U.S. institutions have become an increasingly large portion of hedge fund inflows. In fact, according to a recent Reuter’s article, pension funds, endowments and other large scale American money managers now account for up to three quarters of new money flows into the hedge fund sector. Accordingly, the importance of attracting American assets is growing for European, and even Asian, hedge funds, though significant challenges remain for those trying to enter the U.S. market.
U.S. Regulation Poses Significant Hurdle
One of the major barriers for foreign hedge funds in terms of accessing US investors is the complexity and cost of American regulation. One high-profile hedge fund executive from Europe told Reuters that, “(in terms of regulation) the worst in the U.S.” The requirement to register with both the Securities and Exchange Commission and the Commodity Futures Trading Commission is one such barrier. Many hedge fund managers view the multiple regulators as a hassle, and often face contradictory regulation.
Tax issues also weigh heavily on hedge fund managers looking for U.S. investment. The Foreign Account Tax Compliance Act, or FATCA, will compel all foreign financial institutions to turn over account details to the Internal Revenue Service for American taxpayers with accounts over $50,000. Since tax status is often complex and the penalties for non-compliance are significant, hedge fund views this new regulation as a significant source of regulatory risk.
Competition from U.S. Firms is Fierce as They Defend Their Turf
Foreign hedge funds don’t only have to worry about increasingly vigilant U.S. regulators, but also the fierce competition coming from domestic fund managers within the U.S. Fund managers looking to crack into the market are having second thoughts about expending resources on what might be an unsuccessful venture.
“The U.S. is the largest market but is very competitive. All our largest competitors are based there. What sense does it make to deploy a tremendous effort with much less success?” Arie Assayag of UBP Alternative Investments, a European Fund Manager, told Reuters.
One of the largest fund managers in Europe, London-based Man Group, has had a similarly negative experience entering the United States market. Despite an intensive effort over several years, American investors still only account for 8 percent of its client base. In response, the company has hired the former head of an American hedge fund, John Rohal, in order to work on improving its attraction of U.S. clients.
This approach seems to be common across the industry and offers an opportunity for American hedge fund professionals looking for an international career. Their inside knowledge of the regulation system and what American clients are seeking can be of significant value to international firms.
And foreign hedge funds do have a competitive advantage, or at least a differentiating factor, when compared to their U.S. peers. Such funds can be viewed as having superior insight in the markets in which they are domiciled, providing potentially superior returns compared to American fund managers investing in the same market. Selling that competitive advantage could offer a significant opportunity for foreign funds in the United States.