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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.

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Renewed confidence in financial markets generally, and hedge funds in particular, seems to have launched the industry forward in early 2013. According to the Boston Business Journal, however, fees have continued their downward trend despite the renewed interest. With dwindling revenues despite climbing assets under management, how the industry copes with this changing dynamic will have a significant impact on hedge fund job seekers. Higher expenses from regulatory costs and taxation also are pressuring the bottom line for hedge fund managers.

New Hedge Fund Launches Up Significantly in First Quarter

The first quarter of 2013 saw a significant increase in new hedge funds being launched. The Chicago-based Hedge Fund Research Inc. reported that 297 funds were launched in the first three months of the year, which is the third highest quarterly total since the beginning of 2008. The first quarter of the year is traditionally a strong quarter however, with the only two stronger quarters coming at the start of 2011 and 2012.

The new hedge funds that are being launched are far more conservative than in the past, however. Industry executives have told the Boston Business Journal that most new launches are small and are taking much longer to come to market. “No one is doing anything overly funky,” Michael Silvia, Director at Marcum LLP told the Journal.

Strong Track Records Behind Successful New Launches

Many of the new hedge funds that are being launched are led by established and experienced managers. In uncertain economic times, the strong track record behind these managers provides some confidence to weary investors. Those with less experience are finding themselves seeing small allocations as investors test the waters carefully, or in some cases, they are unable to access the market altogether.

Fee Revenues Declining Despite Renewed Interest

Importantly for hedge fund bottom lines, and accordingly, the ability for firms to bring on new talent, fee revenues have not experienced similar strength in light of this renewed hedge fund interest. In general, investors are feeling fees are too high. Daivd Simoes of Deloitte’s hedge fund practice told the Journal that “the days of ‘two and 20’ are behind us,” reminiscing over the days when fund managers could comfortably earn two percent of assets under management as a flat fee and a 20 percent bonus fee for outperformance. In fact, in the first quarter, hedge funds earned 1.55 percent in management fees on average, and only 17.4 percent in average incentive fees.

What are the Implications for Hedge Fund Job Seekers?

The ongoing pressure on hedge fund fees is weighing heavily on their ability to hire more individuals, despite the growing funds they are managing. Overall, the industry has seen a substantial increase in costs as well, as regulation and taxation issues weigh heavily. This double impact of lower revenue and higher overhead expenses makes it hard to offer higher compensation to core investment staff or to make the investment in bringing on new members to the team. Unless the industry can see some stabilization on the fee front, hedge fund job opportunities likely face continued pressure.

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Hedge Funds Faced with Tax Uncertainty in UK

June 10, 2013

In most jurisdictions around the world, and particularly in Europe, governments and regulators are examining a number of options to rein in compensation for financial industry professionals. In the UK, the government there imposed substantial taxes on high income earners, and, not surprisingly, hedge funds have worked to develop structures in order to pay their […]

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HSBC to Double Hedge Fund Prime Brokerage in Asia

June 3, 2013

Along with economic growth and climbing individual wealth comes increasing demand for alternative asset classes. And increasingly, financial institutions are looking to Asia in order to expand their hedge fund businesses in line with this opportunity. HSBC is the most recent institution to look at one of its traditional markets and consider expansion of their […]

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Macro Funds Sense Opportunity to Outperform

May 27, 2013

Despite being the laggards of the hedge fund industry over the past five years, macro funds are looking to return to form in 2013 as a dramatically shifting global environment plays to their advantage. However, some trends observed by industry experts may weigh on the ability of managers using these strategies to outperform the broader […]

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Hedge Fund Industry Targets Retail Investors

May 20, 2013

One of the next growth opportunities for the hedge fund industry may be the retail market, as investors increasingly seek out alternative asset classes. With analysts predicting that retail assets for the industry will climb to $940 billion over the next four years, from only $305 billion at the beginning of 2013, this represents a […]

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Hedge Funds Remain Resilient

May 13, 2013

It is no secret on Wall Street that hedge fund returns haven’t been a source of excitement this year. In fact, hedge funds have struggled to post gains of only 4.6 percent to date, despite the S&P 500’s meteoric climb past 15 percent in the same span of time. While many would expect hedge fund […]

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