Institutional investors unhappy at EU hedge fund regulation
Hedge funds and institutions fail to see benefits of retail regulations being applied to the industry, says Ernst & Young. Funds will struggle to raise institutional money, there will be consolidation.
Increasing numbers of institutional investors fail to see how hedge fund regulations will benefit them or protect their interests, according to research by Ernst & Young.
A substantial majority (85%) of investors think current regulations will not prevent the next crisis, according to the Global Hedge Fund and Investor Survey 2012.
Only 10% of investors think regulations will protect their interests while 49% say they will be ineffective in this respect.
This is a marked shift from 2010 when 41% of investors thought the regulations would be effective at protecting their interests. Just 21% thought they would be ineffective and 38% were neutral.
“There is a view that retail-style regulation is being applied to a wholesale industry,” notes Julian Young, a partner and head of hedge funds for Europe, Middle East, India and Africa at Ernst & Young.
Many view the EU alternative investment fund managers (AIFM) directive as unnecessary and intrusive.
“People throw their hands up and say ‘we don’t need this, we are sophisticated investors who do a fair amount of our own due diligence and request increasing amounts of transparency from the fund and the fund manager. If we don’t like what we, see we can vote with our feet’,” states Young.
There is regulation fatigue among managers and investors, according to Young. They are sceptical that the regulations will benefit them while pointing to the substantial cost to meeting regulatory requirements.
There are differing opinions on who should bear these costs. The majority (68%) of managers want to pass regulatory registration and compliance costs on to the funds they manage. In contrast 46% of investors think those costs should be covered by management fees.
For marketing expenses (82%), trader compensation (78%) and costs of shadow accounting/processing (80%), most investors think the costs should not be passed onto the fund. Only a few managers pass on these costs on to the fund, with the percentages shrinking since last year’s survey.
The survey also shows differing opinions between hedge fund managers and investors when it comes to compensation structures. When asked how well the company’s compensation scheme aligns risk and performance of individual managers and traders with investors’ objectives, 87% of hedge funds responded ‘very well’. Only 42% of investors responded ‘very well’ when asked the same question about hedge funds, with 44% neutral.