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Regulation and Compliance > Federal Regulation

Compliance Costs Rising

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GREENWICH, Conn. (–Now that the registration deadline has passed, the real test begins for hedge fund managers, who must comply with the new regulation regime of the Securities and Exchange Commission.

Greenwich Associates interviewed 34 hedge fund managers in the U.S. and Europe late last year through early January. They found that most expect their compliance costs to rise in the next year as they hire compliance staff.

Most said they had already seen their compliance costs rise in 2005, with 90% attributing the rising costs to hiring compliance staff. On average, two employees make up the compliance department at hedge fund firms, although some shops reported as many as nine individuals handling compliance work.

Greenwich found that 60% had no interest in outsourcing compliance to a third-party. New compliance professionals will be hired in the next year by 40% of the firms interviewed.

Funds with less than US$1 billion in assets under management rely on one full-time compliance person, while almost two-thirds of managers with assets between US$1 billion and US$5 billion employ between two and four full-time compliance professionals. The hedge fund registration rule calls for the designation of a single chief compliance officer.

“Most funds say they would like to hire more in this area, but in many cases they appear not to be able to find the right people,” said Greenwich Associates consultant William Wechsler, in a statement.

Out of the 34 managers interviewed, 15 firms were not registered. Of those not registered, 8 indicated they had no plans to register with the SEC.

SEC officials believe they’ve captured most of the industry, with 2,102 hedge fund managers now accounted for in the agency’s investment adviser repository.

Contact Bob Keane with questions or comments at [email protected].