From the perspective of hedge fund managers, the Dodd-Frank Act is, in so many ways, a huge drag. The law requires them to register with the Securities and Exchange Commission. To supply reams of sensitive data on trading positions. To screen potential investors more carefully. To 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 these fears against. Wulf Haal, a law professor at the University of St. Thomas in Minneapolis, has released what he says is the first survey of fund advisers to be conducted after the SEC’s March 30 registration deadline. His findings: Despite their grumbling, funds are taking the new regulatory burdens in stride.
Haal and his team heard back from 94 advisers to private-equity, venture capital, real estate, and hedge funds. Three-quarters of respondents said that the new registration and disclosure requirements have not affected their investors’ rate of return. Four-fifths said they did not take Dodd-Frank into account when determining the size of their funds. And seven in 10 said they do not 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,” Waal 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.) The firms that did plan a strategic response to Dodd-Frank tended to be smaller than those that didn’t.
One major source of anxiety for fund managers this summer was Form PF, the unprecedentedly invasive questionnaire that came due for the first time on Aug. 29. The data are supposed to be kept secret, but were there a leak, it would be theoretically possible to reverse-engineer a fund’s strategy—or to detect weak points that could be exploited by rival firms. Waal, though, found anecdotal evidence that the information required by Form PF (and Form ADV) “can be presented 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 have been hoping the data will provide a CAT scan of sorts of the financial system, exposing hidden areas of systemic risk.
“The private fund industry seems to be adjusting well and the impact of the registration and disclosure rules appears to be much less intense than the industry initially anticipated,” Waal concluded.
Caveat one: This is just 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.
Caveat two: It’s possible that many more fund managers would have answered the survey to tell of Dodd-Frank’s burdens, but were literally too buried by paperwork to reach the phone.