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2013: What Does It Mean for the Hedge Fund Industry?

Jan 31, 2013
Jing Chen

After a gray year, the hedge fund industry is looking a lot brighter for 2013.

Despite the unpredictability of the market, many hedge fund professionals agree that the $2 trillion industry will continue to grow this year, while increased regulations will force fund managers to shift the way they operate their firms by focusing more on back-office activities.

Jonathan White, the business development manager of North America at hedge fund administrator Viteos Fund Services, told eVestment that “large funds will be implementing a robust back office” for the first time in 2013 due to the introduction of new regulations aimed to increase transparency in the notoriously secretive industry. One such regulation is the Form PF, which is an extensive report the Securities and Exchange Commission mandate that firms with at least $150 million in assets under management must fill out.

eVestment also spoke to Marshall Saffer, the chief operating officer at MIK Fund Solutions, who predicted that regulatory rules have  “increased interest [from investors] in what [fund administrators] do.” The “increased interest” has prompted business in the fund administration space to boom and will continue to do so throughout the year.

Saffer also added that he believes the industry’s “inflows will continue to rise and people will still allocate,” specifically to “more established and institutional [firms]” this year.

Financial consulting and auditing firm Deloitte’s recently-released “2013 Hedge Fund Outlook” indicated that “the average institutional allocation in hedge funds is about 10% and is expected to double by 2016.”

In a statement released earlier this month, Virginia-based hedge fund consulting firm Agecroft Partners Agecroft predicted that hedge funds “will set a new record for assets in 2013 despite the lackluster investment performance over the past two years.” The firm suggested that the majority of the asset growth in the industry this year will be attributed to pension funds increasing their hedge fund investments, and a “broadening of the hedge fund investor base due to the passage of the JOBS Act.”

The JOBS Act, which was signed into law by President Barack Obama last year, would allow hedge funds to market to potential investors more freely once the SEC issue the regulations. The industry has historically been restricted by law to market themselves to only a small group of investors with whom they already have a relationship. Marketing on a larger scale is considered solicitation.

Increased regulations don’t just affect the U.S.  For the first time, hedge funds across the European Union will be consistently regulated under the Alternative Investment Fund Managers Directive. Currently in the “Level 2” of implementing final rules, AIFMD is expected to take effect in July.

Marc Saluzzi, chairman of the Association of the Luxembourg Fund Industry, said in an interview with eVestment last month that like the U.S., “the most important obstacle for Europe in 2013 is to find solutions for hedge fund managers to the new regulations.”

Saluzzi also revealed that acceptance of the new regulations is another obstacle.

“[Hedge fund managers in the European Union] still believe that many [rules within the] AIFMD will not work,” Saluzzi said, “but I think there is a higher degree of acceptance now [than in 2009].”

With the introductions of new regulations, heightened market volatility, stressed global macroeconomic conditions and underperformance, 2012 was a tumultuous year for the hedge fund industry. While the market can be difficult and even impossible to predict, industry professionals are certainly optimistic for 2013.


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