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Emerging Hedge Funds Spend 20% on Compliance but Could Save Through Outsourcing

A survey conducted by AIMA (Alternative Investment Management Association) and prime broker GPP reports that emerging hedge funds spend 20% of fees on compliance and regulation but could be outsourcing more to help profitability.  The survey of hedge fund managers with less than $500 Million in AUM finds that “almost 90% of respondents” allocate “up to one-fifth of their total expenditure to compliance, with this number expected to increase when firms adhere to MiFID II.”  The report argues that firms should be outsourcing more functions, including compliance, because asset allocators are much more concerned about the pedigree of a firm’s service providers than a its outsourcing practices.  The survey data shows that smaller firms can become profitable at less than $100 Million in AUM, contradicting commonly held beliefs about scale.

OUR TAKE: Back in 2013, a KPMG study reported that global hedge fund firms spend 7% on regulatory compliance (which we believe is about 5% of total revenue).  This latest AIMA/GPP survey shows that smaller firms pay a greater percentage and that the regulatory burden continues to increase.  As allocators focus more on service providers than outsourcing, investment firms should consider outsourcing compliance to a more efficient third party resource and focus on the core business of raising and managing assets.


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