In the wake of SEC registration requirements for hedge funds that went into effect Feb. 1, it is no surprise that 95 percent of hedge funds participating in a year-end Greenwich Associates survey reported a rise in compliance costs in 2005, or that 90 percent of respondents reported additional costs associated with hiring new staff dedicated to compliance efforts. But given the fact that those hedge funds targeted by the SEC requirements now should be compliant, what is eye-opening is that nearly half of the 34 compliance officers from U.S. and European hedge funds who were surveyed expect their 2006 compliance costs to exceed last year's. This finding likely reflects the large camp of hedge fund managers that believes the registration rules are only the first step in a broader regulatory framework envisioned by the SEC.
According to Greenwich Associates, the credibility afforded by SEC registration may become a necessary qualification for hedge funds looking to market themselves to institutional investors, regardless of whether or not they are legally obliged to register. "The expectation of rising costs indicates that hedge fund managers as a whole recognize that, for better or worse, hedge funds are entering into a new era of regulation," said Karan Sampson, hedge fund specialist for Greenwich Associates, in a release.