April 10, 2012
A new report, The Dodd-Frank Bill – a Year and a Half Later: Views from the Hedge Fund Industry was issued today by the Frank G. Zarb School of Business at Hofstra University in conjunction with accounting and advisory firm EisnerAmper LLP. Among the key findings, hedge fund managers reported that Dodd-Frank rules driving increased transparency while increasing investor demand for information have been broadly positive for the industry. Due diligence process, risk management procedures and reporting requirements all have increased investor acceptance of hedge funds, allowing them to become increasingly mainstream investment vehicles for institutional and individual investors.
Large firms, in particular, seemed to welcome the additional scrutiny, with large majorities favoring SEC registration, the European Passport and a majority backing supervision from the Treasury and the Federal Reserve Bank.
“Managers view registration with the SEC as a cost of doing business,” said Nicholas Tsafos, partner in accounting firm EisnerAmper. “It makes investors more comfortable with hedge fund investing.”
More than 40 senior managers from hedge funds and asset management firms were interviewed in depth by phone or via a detailed email survey. The interviews allowed for follow-up questioning to gain clarity and support the conclusions of the survey. Half of the respondents were from funds with assets under management (AUM) that exceeded $1 billion. The responding executives were at companies that covered activities including long-short funds, global-macro, fixed income, commodity, arbitrage, event-driven and sector specific strategies.
Other significant findings include:
- Managers expect their operational cost will rise due to increased costs of the regulations found in the Dodd-Frank bill
- Pending European Union (EU) regulation may limit remuneration (73% of small fund managers agreed, while 50% of large fund managers did)
- Large (63.2%) and small (78.1%) fund managers expect that new provisions would harm U.S. competitiveness
- Very few managers felt that the Federal Stability Oversight Committee (FSOC) would be able to tame systemic risk in the financial system (only 11.1% of large funds and 10.5% of small funds agreed)
- The Report makes several concluding statements regarding the impact of Dodd-Frank including the realization that the ramifications of the proposed reforms are not yet clear eighteen months after passage of the Act, with many of the more than 400 rules not yet finalized. Anoop Rai, a professor at the Zarb School, and one of the principal authors of the Report, said that in fact this was “…reassuring, as these are important rulings and should be made only after thorough discussions and vetting with all the affected parties.”
“The regulatory landscape for hedge funds in 2012 is dramatically different from what came before as Dodd Frank’s rules become final,” Tsafos added. “While the large firms are largely embracing the changes, they are threatening to smaller hedge funds as start-up costs increase.”
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