Canadian hedge fund industry feeling weight of compliance management

In the wake of the London Interbank Offered Rate benchmark scandal – where executives are alleged to have doctored the financial tool banks that buy-side financial institutions use to assess investment performance – compliance management has become more of a concern for business operations. This has been apparent in the U.S. as well as in Europe. Additionally, the hedge fund industry is also putting more of a priority on compliance, particularly in Canada.

The report, appropriately titled “The Cost of Compliance,” found that the average amount of money hedge fund managers spend on compliance per year averages $700,000 for small fund managers, $6 million among medium and $14 million for large, according to the analysis, which was performed jointly by the Alternative Investment Management Association and the Managed Funds Association.

Peter Hayes, one of the researchers involved in the analysis, said that hedge fund executives do a great deal of behind the scenes work to make sure their financial records management is in accordance with the appropriate rules and regulations.

“Fund managers are working hard to deal with the challenges of compliance, in terms of capital investments, human resources and time,” said Hayes. “In Canada particularly, we have seen the cost of compliance continue to rise as managers are subject to a high level of regulation, especially as far-reaching global regulation, such as Dodd-Frank, [Foreign Account Tax Compliance Act and Alternatives Investment Fund Managers Directive] finds its way across the border.”

Compliance investments don’t come cheaply
Among hedge fund managers globally, compliance costs average approximately $3 billion per year, the study found, with between 5 percent and 10 percent of that total being devoted to strategy and technology.

Furthermore, much of the burden regarding compliance management isn’t being shared. The analysis found that hedge fund managers tend to take on the brunt of the costs stemming from compliance, rather than passing them on to the funds being invested in.

What’s complicated matters further is the breadth and scope of some of the measures hedge fund managers have to take in order to comply, as many find the tasks confusing. For example, with the AIFMD directive, 66 percent of respondents said they needed assistance from an outside authority. Roughly the equivalent percentage said they needed help for the FATCA and over 60 percent said they couldn’t get past the registration and reporting process for the Securities and Exchange Commission by themselves.

Buy-side financial institution experts say that business executives should make compliance a priority, devoting as many resources as possible to these activities well before deadlines are reached. According to American Banker magazine, these tasks might include creating compliance manuals, establishing procedures that govern what actions to take and perhaps even setting up job titles so that compliance can be monitored.

Like big data, compliance is more of an umbrella term, but its basic definition is the act or actions of living up to the rules and standards that have been established.

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