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Alternative Investment Management Association Representing the global hedge fund industry

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AIMA/KPMG reports on state of global hedge fund industry

The cost of compliance: Global Hedge Fund Survey by AIMA/MFA/KPMG

October 2013

A global survey of hedge fund managers revealed that they are making significant investments in their firms' infrastructure to comply with new regulatory requirements.

According to The Cost of Compliance, a report produced by AIMA, the MFA and KPMG, the average spend on compliance was at least (US)$700,000 for small fund managers, $6 million for medium-size fund managers, and $14 million for large fund managers.

The survey, one of the largest global surveys of hedge fund managers, was conducted between May and August 2013 and included the views of 200 hedge fund managers representing more than $910 billion in assets under management (AUM).  It also included in-depth interviews with managers from North America, Europe and Asia.

The study found that the hedge fund industry has already invested heavily in compliance efforts to meet new global regulations, having spent more than $3 billion to date on compliance costs.  Hedge fund managers were found to be spending anywhere between 5% and upwards of 10% of their operating costs on compliance technology, headcount and strategy.

The survey found that the cost of compliance is creating a heavier burden on smaller firms and could become a barrier to entering the market.  The smaller firms are spending more - both as a percentage of AUM and relative to operating costs - than their larger counterparts.  In fact, more than a third of hedge fund managers polled with less than $250 million in AUM said compliance requirements consume more than 10% of their total operating costs. The survey also found that overwhelmingly, managers are shouldering the majority of the costs associated with compliance, and not passing them on to the funds.


The evolution of an industry

May 2012

The post-2008 influx of institutional money into hedge funds has resulted in a marked increase in the global industry’s operational sophistication and transparency to investors, according to a report released in May 2012 by KPMG, the international audit, tax and advisory firm, and AIMA.

The report, entitled “The Evolution of an Industry”, is based on a survey of and in-depth interviews of 150 hedge fund management firms globally with more than $550 billion in combined assets under management. It found that hedge fund management firms have increased their operational infrastructure in areas like investor transparency and regulatory compliance as allocations from institutional investors have increased.

Seventy-six per cent of respondents have observed an increase in investment by pension funds since 2008, while institutional investors as a whole, including funds of funds, accounted for a clear majority (57%) of assets under management.

The report finds that the increase in institutional investment has led to more thorough due diligence and greater demands by investors for transparency, with 90% of respondents reporting an increased demand for due diligence since 2008. 

Eighty-four per cent of all respondents indicated they had increased transparency to investors since 2008, which is reflected by the fact that the majority of firms have taken on multiple members of staff to respond to these increased investor demands.

The report also found that hedge fund management firms had almost universally increased investment in regulatory compliance since 2008, with 98% of firms hiring additional staff in this area.


The value of the hedge fund industry to investors, markets and the broader economy

April 2012

Hedge funds significantly outperformed traditional asset classes such as equities, bonds and commodities over the last 17 years according to a study released in April 2012 by The Centre for Hedge Fund Research at Imperial College in London. The research, commissioned by KPMG, the international audit, tax and advisory firm, and AIMA, is the most comprehensive of its kind to date.

The report, entitled “The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy”, found that, per annum, hedge funds returned 9.07% on average after fees between 1994 and 2011, compared to 7.18% for global stocks, 6.25% for global bonds and 7.27% for global commodities.

Moreover, hedge funds achieved these returns with considerably lower risk volatility as measured by Value-at-Risk (VaR) than either stocks or commodities. Their volatility and Value-at-Risk were similar to bonds, an asset class considered the least risky and volatile. The research also demonstrated that hedge funds were significant generators of “alpha”, creating an average of 4.19% per year from 1994-2011. Portfolios including hedge funds also outperformed those comprising only equities and bonds, The Centre for Hedge Fund Research concluded. The study showed that such a portfolio outperformed a conventional portfolio that invested 60% in stocks and 40% in bonds. The returns of the portfolio with an allocation to hedge funds also yielded a significantly higher Sharpe ratio (which characterises how well the return of an asset compensates the investor for the risk taken) with lower “tail risk” (the risk of extreme fluctuation).

The Centre for Hedge Fund Research has created a unique aggregate hedge fund and benchmark index database. The database represents a careful aggregation of all the current information from multiple leading sources about hedge fund performance globally. Survivorship bias is not a factor because both active and inactive funds are included. The report also highlights the positive contributions the hedge funds industry makes to the broader economy. Not only are hedge funds important liquidity providers in the markets they are active in, they also have a role to play in the efficient allocation of capital, portfolio diversification and financial stability.

 

 

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