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2013 Business Expense Benchmark Survey
Compensation for Compliance Personnel
Outstrips All Other Costs
Within the compliance function, we further asked
participants to break down their expenditures,
highlighting how much of their cost came from
compensation to their internal team, how much was
attributed to software or other third-party charges
being assessed to the management company and
finally, how much third-party expense was being
charged back to the fund level. The results of this
analysis are highlighted in Chart 37.
For small hedge funds with only $100 million AUM,
compensation accounted for 8.7 basis points
($87,000) out of total expenses of 17.7 basis points
($177,000)—49% of total compliance expense. The
other half of the budget for these firms is being
spent on third-party assistance. This indicates the
necessity for small funds to outsource much of their
regulatory and compliance burden. One benefit of
this approach is that because these are external
charges related to the operations of the fund, these
firms are able to charge back a higher share of their
expenses to the fund level (21%). The cost of building
in house capabilities is still prohibitive at these bands.
This changes as firms grow their AUM.
At other size bands, the percentage of compliance
spend related to compensation was actually
significantly higher, near 70% or more. This reflects
the move to internalize more of their own controls, a
feature of the institutional phase of development.
Overall dollar-based costs of compliance rise only
modestly, from $177,000 to $210,000 as hedge
funds move from $100 million to $500 million
AUM, but the composition of those costs is quite
different. Expenditures on software and other
third-party services shrinks from 51% to only
23% of compliance spend. This share continues to
decline at every progressive AUM level within the
institutional category, falling to only 6% for firms with
$10.0 billion AUM.
Total spending on compliance stabilizes at $500
million and remains at 3 to 4 basis points as firms
move through their entire institutional phase of
development, culminating when AUM reaches $10
billion. The amount of expense being charged back at
the fund level settles around 0.1 basis points. By $10.0
billion AUM, even this minimal charge evaporates,
and all of the software and third-party costs related
to compliance are being borne by the management
company.
A similar pattern holds true as firms surpass $10.0
billion AUM and reach the franchise stage, but the
shifting product range of these franchise firms results
in a somewhat different mix of third-party expenses
being borne at the management company level.
Whereas compensation continues to account for the
majority of compliance expenditures (80%), there
is a sharp jump in spending related to compliance
software. This reflects the ready availability of
compliance monitoring systems for regulated and
long-only products compared to the more complex
private fund industry. Software accounts for 15% of
the expenses for the largest franchise-sized firms.
SEC
Registration
& Compliance
SEC
Reporting
Derivatives
Clearing
AIFMD
Registration
& Compliance
AIFMD
Reporting
FATCA
Asian
Regulation
>10B
10B
5B
1.5B
500M
100M
Chart 36: Amount of Total Third Party Spend Focused on Regulation: By Regulatory Mandate
Zero
Mild
Moderate
Significant
Severe