Key Takeaways
- • Small hedge fund managers with less than $250 million in assets under management spend an average of $700,000 annually on compliance, representing more than 10 percent of total operating costs for over one-third of firms in this category.
- • Compliance spending scales significantly with fund size: medium-sized managers average $6 million annually while large managers average $14 million, creating a proportionally heavier burden on smaller firms relative to assets under management.
- • A survey of 200 hedge fund managers representing $910 billion in combined assets found that managers are absorbing the vast majority of compliance costs internally rather than passing them to funds, viewing these investments as competitive necessities.
- • Rising compliance barriers present a material threat to market entry for emerging managers, potentially limiting the flow of new talent and ideas into the hedge fund industry, according to AIMA CEO Andrew Baker.
Summary
Hedge fund compliance costs are creating a significant operational burden, particularly for smaller market participants, according to the Cost of Compliance report produced jointly by KPMG, the Alternative Investment Management Association (AIMA), and the Managed Funds Association. The survey of 200 hedge fund managers overseeing more than $910 billion in assets under management reveals a troubling disparity in how regulatory expenses affect firms across different asset tiers.
The cost structure is stark: small fund managers spend an average of $700,000 annually on compliance, mid-sized managers $6 million, and large managers $14 million. More significantly, over one-third of small managers report that compliance requirements consume more than 10 percent of their total operating costs. This burden is not equally distributed—smaller firms face a disproportionate compliance expense relative to both their assets under management and operating budgets compared to larger competitors, creating a structural disadvantage in an increasingly regulated environment.
Andrew Baker, CEO of AIMA, highlighted the dual nature of the challenge: while the survey demonstrates the industry's commitment to building robust operational infrastructure for regulatory compliance, he warned that excessive regulation risks "raising barriers to entry to the industry" at a time when emerging managers represent a critical source of innovation and talent. The compliance cost burden thus extends beyond mere operational expense, potentially foreclosing opportunities for next-generation fund managers to establish and scale their operations.
The survey also reveals that hedge fund managers are absorbing the majority of compliance costs without passing them to underlying fund investors. Rob Mirsky, lead partner for KPMG's global hedge fund practice, noted that while this approach reflects the industry's commitment to dealing with compliance challenges—encompassing capital investments, human resources, and management time—managers view these investments pragmatically as future competitive advantages. The implication is that firms perceive regulatory compliance not merely as a cost of doing business but as a necessary investment in operational credibility and market positioning.
The cost structure is stark: small fund managers spend an average of $700,000 annually on compliance, mid-sized managers $6 million, and large managers $14 million. More significantly, over one-third of small managers report that compliance requirements consume more than 10 percent of their total operating costs. This burden is not equally distributed—smaller firms face a disproportionate compliance expense relative to both their assets under management and operating budgets compared to larger competitors, creating a structural disadvantage in an increasingly regulated environment.
Andrew Baker, CEO of AIMA, highlighted the dual nature of the challenge: while the survey demonstrates the industry's commitment to building robust operational infrastructure for regulatory compliance, he warned that excessive regulation risks "raising barriers to entry to the industry" at a time when emerging managers represent a critical source of innovation and talent. The compliance cost burden thus extends beyond mere operational expense, potentially foreclosing opportunities for next-generation fund managers to establish and scale their operations.
The survey also reveals that hedge fund managers are absorbing the majority of compliance costs without passing them to underlying fund investors. Rob Mirsky, lead partner for KPMG's global hedge fund practice, noted that while this approach reflects the industry's commitment to dealing with compliance challenges—encompassing capital investments, human resources, and management time—managers view these investments pragmatically as future competitive advantages. The implication is that firms perceive regulatory compliance not merely as a cost of doing business but as a necessary investment in operational credibility and market positioning.
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