Report: Growing Regulatory Requirements Strain Hedge Fund Infrastructures

(June 22, 2011) – Claiming that “the bar has been raised,” a report by PricewaterhouseCooper has contended that hedge funds need to expand their infrastructure in order to meet due diligence demands of leery investors and regulators.

“New regulations in the US and Europe are driving specific infrastructure enhancements in areas such as compliance, risk management, valuation, tax and investor reporting,” the report, entitled “Infrastructure: From Cost to Benefit,” stated. “Although many details of new regulations remain unclear, the bar has been raised. We are already witnessing ‘survival of the fittest’ in the rejuvenated hedge fund world.”

In the aftermath of the 2008 stock market crash, valuing hedge fund assets, particularly illiquid holdings, became “a critical area where investors and regulators desire[d] objectivity,” the report said. The result of this newfound concern was that due diligence was becoming “more rigorous, more intrusive and more time-consuming.”

The report recommended that hedge funds devote more resources toward developing and maintaining an adequate infrastructure to respond to the demands of investors and regulators. “Having a strong and robust infrastructure is becoming a prerequisite for raising assets,” the report stressed.

PricewaterhouseCooper also warned that hedge funds would have to scramble to retain talented individuals as the importance of infrastructure grows: “Competition for high-quality tax, risk and compliance staff is rising, demonstrating the importance of having experience people with good credentials.”

“At a time when hedge fund investors, legislators and regulators are seeking improved governance, controls and transparency, strong infrastructure is critical,” it added.

The report sounded an optimistic note, arguing that the market collapse has allowed the hedge fund industry to evolve.

“With the benefit of hindsight, the credit crisis is proving a defining moment in the hedge fund sector’s evolution. By revealing not only the strengths of its investment strategies, but also the vulnerabilities of its governance and operational model, the crisis prepared the sector for its next stage of growth.”