Managers of hedge funds and other alternative funds know they'll be subject to more stringent regulatory requirements in the wake of the Dodd-Frank Wall Street Reform Act but for now it's business as usual and right now that business is booming.
According to a new report released this week by Boston-based financial services research and consulting firm Aite Group, global hedge fund assets rose to more than $1.92 trillion worldwide at the close of 2010, bringing the industry within a whisker of its all-time peak of $1.93 trillion in 2008.
In between these high-water marks, however, were a number of high-profile financial scandals, the ensuing bailout of some of the nation's most prominent banks and the passage of new legislation aimed at reforming the financial industry as a whole including hedge and other alternative funds.
But Aite Group's report concludes that whatever burden comes of Dodd-Frank and the EU Directive on Alternative Investment Fund Managers for hedge funds and their managers will be at least as expensive and time-consuming for the regulators looking to enforce more stringent reporting standards outlined in the law.
"Regulation is back and it was inevitable," said Denise Valentine, an Aite Group analyst and the report's author. "Most of these firms are and have been registered for some time. That's the thing's different about regulation this time around. The environment has changed and now the U.S. and European regulators are basically doing the same thing."
Indeed those hedge funds that were previously unregistered will as a result of Dodd-Frank be registering in droves and, most likely, overwhelming "under-resourced" and "under-skilled" state governments that lack both the funding and understanding of how a hedge fund works to properly regulate all alternative funds.
Fortunately, the report finds that most hedge funds have been steadily improving their own internal reporting and disclosure efforts in advance of new regulation not only to be ready for the impending legislative reality but to satisfy the discerning eyes of their largest clients: institutional investors.
For the first time in 2010, institutional investors eclipsed high net worth individuals as the largest hedge fund participants, contributing 61% of all assets last year compared to just 48% in 2008.
"This shift to a sophisticated institutional client has inspired hedge funds to create more sophistication in their own operations, infrastructure and marketing," the report said. "These firms, many of which remained registered after 2006, have built their company infrastructure in people and operations to successfully pass muster in the institutional due diligence process."