MFA Industry Survey on Compliance Costs (with Lofchie Comment)
According to The Cost of Compliance - a new global report produced by MFA, KPMG International, and the Alternative Investment Management Association ("AIMA") - hedge fund managers are making significant investments in their firms' infrastructures to comply with new regulatory requirements, with smaller firms spending relatively more than their larger counterparts.
The survey was conducted between May and August of this year and includes 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. Significantly, the survey found that the cost of compliance is creating a heavier burden on smaller firms and could become a barrier to their entering the market. Notably, more than a third of hedge fund managers polled with less than $250 million in AUM said compliance requirements consume more than 10 percent of their total operating costs.
Lofchie Comment: One of the most anticipated consequences of Dodd-Frank is that, despite the governmental talk about firms that are "too big to fail," the costs of financial regulation are driving small firms out of business. Compliance costs, while not entirely fixed, are subject to significant economies of scale. It therefore follows that large compliance costs drive small firms out of business, since they cannot compete with bigger firms that are able to spread the burden. What makes this even worse for the economy is that so much of the regulation that is expensive serves little purpose; e.g., the hundreds of millions of dollars that are spent answering Form PF, the most important questions of which are largely incomprehensible and the information gleaned is therefore useless.
Click here to view the report in full (links externally to MFA pdf).