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From the perspective of hedge fund managers, the Dodd-Frank act is in many ways a huge drag. The law requires them to register with the Securities and Exchange Commission, supply reams of sensitive data on trading positions, carefully screen potential investors, and hire compliance officer after compliance officer. How could all of this not eat into profits and hamstring competitiveness?
Now there are some early data to weigh against these fears. Wulf Kaal, a law professor at the University of St. Thomas in Minneapolis, has released the first survey of fund advisers to be conducted since parts of the law began taking effect. His findings: Despite their grumbling, funds are taking the new regulatory burdens in stride. Kaal and his team spoke with 94 people who work for private equity, venture capital, real estate, and hedge funds. Three-quarters of respondents said the new registration and disclosure requirements haven’t affected their investors’ rate of return. Four-fifths said they didn’t take Dodd-Frank into account when determining the size of their funds. And 7 in 10 said they don’t plan a “strategic response” to Dodd-Frank. In other words, the law won’t lead them to alter their investing style.
“Despite [their] concerns, the hedge fund industry appears to be only modestly affected by the Dodd-Frank reporting and disclosure requirements and is adapting well to the new regulatory environment,” Kaal writes. A majority of survey respondents estimated their Dodd-Frank operational costs to be between $50,000 and $200,000 per year, requiring 500 or fewer hours of work. (One adviser—a significant outlier—indicated costs of $2 million and 4,000 man-hours.)
A major source of anxiety for fund managers this summer was Form PF, the invasive questionnaire that came due for the first time on Aug. 29. Firms had to disclose sensitive information about their businesses to the government. The managers were concerned that if it leaked, it would be possible to reverse-engineer a fund’s strategy—or to detect weaknesses that rival firms could exploit.
Kaal, though, found anecdotal evidence that the firms can answer the questions “in ways that in effect ‘flatten out’ and ‘sanitize’ the disclosures.” That’s great from the funds’ perspective. It’s not so great for regulators at the newly formed Financial Stability Oversight Council, who’d expected the data to provide a CAT scan of the financial system, exposing hidden areas of systemic risk.
In general, the larger the fund, the easier it is to absorb the cost and manpower necessary to meet the law’s new requirements. “Some of the really big ones automated the process internally, because they had the IT staff to be able to do that,” says Kelli Moll, a partner at law firm Akin Gump Strauss Hauer & Feld, who specializes in hedge fund operations. “But the next wave of managers are not so large. And I think they’re still struggling.”
Even so, Moll adds, “once they get their first filing done, or their second filing done, I think it’s going to be not so terrible. People are going to adjust.” Kaal agrees. “The impact of the registration and disclosure rules appears to be much less intense than the industry initially anticipated,” he concludes.
There is one caveat: These are preliminary data. “Future studies are needed to determine if the long-term impact of the Dodd-Frank act is as moderate as this study suggests,” the paper says. It’s too early to measure “undeterminable opportunity costs because of distraction from core fund management” and what costs might be passed to investors in the form of fees.
Make that two caveats: It’s possible that many more fund managers would have answered the survey to tell of Dodd-Frank’s burdens, but were too buried in paperwork to get to the phone.
The bottom line: In a survey of 94 fund advisers, three-quarters say new Dodd-Frank regulations haven’t changed the way they do business.