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Corporate governance: The price of hedge fund institutionalisation

Institutional selection criteria will continue to drive not only hedge fund compliance, but also the evolution and professionalisation of the hedge fund industry as a whole, argues John Webster of Greenwich Associates.

This article appears courtesy of Global Investor.

Hedge funds may be entering a new era of regulation, but hedge fund managers in the US are finding that checking the box for registration is just the start of what promises to be a long and expensive expansion of their internal compliance functions. Nearly all the US hedge funds participating in a year-end study by Greenwich Associates said that their compliance costs increased dramatically last year. This was due to one-time expenses associated with registering with the Securities and Exchange Commission or other growing expenditures for compliance staffing, fees and technology. The more surprising news was that almost half of the hedge funds surveyed expected their compliance costs over the next 12 months to top the amount spent in 2005.

Although the immediate driver of these new expenses appears to be regulation, a closer look at the hedge fund industry suggests that managers are implementing new compliance efforts as much to satisfy the demands of institutional investors as to placate regulators.

A growing market

According to our latest research among pension plan sponsors and other institutional investors, 28% of US institutions now invest in hedge funds and another 5% expect to start doing so in the next year.

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