Nearly one-half of hedge funds participating in a year-end study by Greenwich Associates expect their compliance costs over the next 12 months to top the amount spent in 2005 — the year in which many of them incurred sizable expenses associated with registering with the US Securities and Exchange Commission.
Greenwich Associates surveyed 34 compliance officers at prominent hedge funds operating in the US and Europe. Many were concerned with creating effective record-keeping systems and practices, particularly for e-mail retention. Monitoring and enforcing rules regarding personal trading by fund employees, was also a common concern, along with the problems of getting buy-in from top level management.
"There is a real question in the minds of many chief compliance officers about whether the independent-minded partners of hedge funds will fully listen to a CCO," says Greenwich Associates consultant William Wechsler. "This could pose a significant risk to hedge funds facing the increased compliance burden associated with registration."
With regard to costs, nearly 95% of the hedge funds participating in the study saw their compliance costs rise in 2005. New hires contributed significantly to this increase: about 90% of funds said their compliance staffing levels rose last year, with most funds experiencing increases on the order of 10-25%.
Other significant drivers of increased compliance spending were IT expenditures and 'business cost'” such as fees paid to outside consultants, and the expense of preparing registration documentation and planning for registration.