The paper, co-authored by Citi and Alas Consulting, sees the new rules as an 'equalizer', putting private funds' regulatory disclosures and compliance practices on a par with those of traditional asset managers governed by the Investment Adviser's Act of 1940 and the Investment Company Act of 1940.

"Hedge funds complying with Dodd-Frank will need to do more than just respond to written regulations in a manual," says Richard Webley, US head of management consulting at Citi Prime Finance.

Many firms have already begun to identify the steps needed to comply, including registration with the SEC and implementation of compliance programmes, says Steve Lipof, head of Alas's compliance and regulatory practice, who describes the development as "a significant paradigm shift" in the hedge fund industry.

"Hedge funds and other private funds must actively assess their operations, identify potential risks and conflicts, and tailor their own procedures to the new regulatory requirements," he says.

Separately, a report from Morgan Stanley and Oliver Wyman forecasts that over-regulation of the banking industry will lead to a bonanza for hedge funds and private asset managers as large investment banks are forced to quit once lucrative markets. The shift is likely to hit British banks the hardest, as the FSA moves to impose tougher capital rules than other international markets.

Banks will have to cut as much to eight per cent of their front office costs in the next year to meet regulatory demands, according to the report, leading to large scale job cuts across the City.

Read the full Citi paper: