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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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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.

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Hedge Fund Size a Key Driver of Performance

March 11, 2013

The performance of hedge funds based on relative size has been a topic of discussion for several years. Many studies have been published attempting to determine whether fund size is a key indicator of expected returns. In order to add additional information into this debate, recently took a look at the results of 3,000 […]

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Hedge Fund Regulation a Threat to the Industry

March 4, 2013

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 […]

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Hedge Fund Industry Posts Positive Growth in 2013

February 25, 2013

The hedge fund industry saw its assets under management climb to $2.6 trillion in 2012 as strong performance and net investment inflows benefited the sector. Performance alone accounted for $116.3 billion in growth as stronger global markets created more opportunities for hedge fund managers. In terms of investor flows, the sector saw $29 billion in new […]

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The Hedge Fund Industry Has an Ally in European Parliament

January 28, 2013

The growing pressure that the hedge fund industry is facing from regulators and the few individuals that have been willing to stand against the political tide were featured in a recent piece by the Financial News. Syed Kamall is a member of the European Parliament, representing London, one of the hedge fund centers of the […]

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Equity Hedge Funds Look to Earn Their Fees in 2013

January 14, 2013

After sluggish performance over the past several years, investors in equity hedge funds are certainly hoping for better results in the year ahead. According to Barron’s, over the last three years, equity hedge funds have averaged a return of only 3.42 percent. This is less than half the return investors in fixed income funds experienced, […]

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