The Value of Hedge Fund Regulations Questioned

After the 2008 stock market collapse, hedge funds faced increased oversight and regulation by financial authorities around the world. This not unexpected, as hedge funds can be amongst the riskiest investment classes in the market, though this is certainly not always true. Nonetheless, the industry as a whole was painted by the same brush, causing a great deal of political pressure on the industry. As regulations increased, investors have begun to question whether these regulations are intended to true protect investors.

According to a Greenwich Associates survey, which as conducted for global financial consultancy Ernst and Young, only 10 percent of institutional investors believe that new hedge fund regulations would protect their interests. This suggests that either the current set of rules is not strict enough, or that the rule set is poorly defined and ineffective. As a result, it shouldn’t be a surprise that an overwhelming 85 percent of respondents believed that hedge fund regulations were not a key element in preventing the next financial crisis. The survey interviewed 100 leading hedge fund managers and 50 institutional investors.

Convergence in Priorities, Divergence in Execution

Interestingly, both hedge fund managers and institutional investors have similar views on some of the risk management strategies being employed by firms to meet expanded hedge fund regulations. When it came to headcount and technological advantages in risk management, there was a lot of agreement between the two parties. However, as expect, when it comes to compensation structure and fees, the two sides aren’t seeing eye to eye.

Ernst and Young suggests that fund managers actively engage securities officials in order to influence future hedge fund regulations. By keeping the regulators focused on value added risk management and compliance activities, fund managers can both reduce growing political pressure on the industry and provide value for their investors.

Hedge Fund Regulations are an Additional Cost to Investors

The cost of additional regulations can be substantial to hedge fund investors as firms are forced to upgrade technology and increase staffing in their compliance and risk management departments. Overtime, these costs may increase fees for hedge funds to the point where they are uncompetitive with lesser regulated peers. Other funds may seek to locate in jurisdictions with less onerous regulations in order to reduce their costs.

What Does This Mean for Those Seeking Hedge Fund Opportunities

Additional hedge fund regulations are certainly an interesting development for those looking for alternative paths into the hedge fund industry. As mentioned, firms are being required to add substantially to their compliance and risk management functions, which allows those with relevant experience in these areas an opportunity to join the industry.

As with all positions in the financial industry today, competition will still be quite fierce even in these expanding roles. With many risk managers and compliance officers coming from the declining investment banking and proprietary trading industry, the competition is both skilled and motivated. As hedge fund regulations continue to expand however, the need for these professionals will continue to rise, perhaps beyond what the current financial professional industry can provide.

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