In the aftermath of the financial crisis, hedge funds must invest more resources in employing compliance staff, meeting tax rules and building investor confidence through internal control reports.
A new report from consultancy PwC says the push for this improved infrastructure comes from regulators and large institutional investors, both of whom demand greater transparency from traditionally secretive hedge funds.
The new rules include the forthcoming Alternative Investment Fund Managers (Aifm) directive in Europe and the Dodd-Frank reform act in the US. These seek to control risk in the financial system by making alternative fund managers more accountable.
Meanwhile, the requirements of institutional investors to see appropriate controls as part of their due diligence are forcing hedge funds to adopt new processes or risk losing business. According to the PwC report, “having a strong and robust infrastructure is becoming a prerequisite for raising assets”.
The effects of these changes are being felt in greater competition – and rising salaries – for staff trained in tax, risk and compliance procedures. Hedge fund managers are also commissioning more internal control reports, says PwC, as they seek to win investors' trust.
Although adopting these new practices is costly for hedge funds, PwC says the effects will be positive for the industry. They will make hedge funds better at responding to regulation and competing for institutional clients, for instance. In addition, bringing in new technology to provide risk reporting could make hedge funds more efficient.
“With the benefit of hindsight, the credit crisis is proving a defining moment in the hedge fund sector’s evolution,” read the report. “By revealing not only the strengths of its investment strategies, but also the vulnerabilities of its governance and operational model, the crisis prepared the sector for its next stage of growth.”
©2011 funds europe