Eurekahedge/AIMA Japan Survey: Investments In Regulatory Compliance Rising

Jun 8 2017 | 7:55pm ET

Regulatory compliance now accounts for up to 10% of the total expenses for Japanese fund managers and institutional investors, according to a new joint survey by Eurekahedge and the Japanese branch of the Alternative Investment Management Association (AIMA), while nearly three-quarters of investors expect to maintain current allocations to hedge funds and other alternative investments.

Around half the polls respondents allocate between 5% and 9.9% of their total expenditure on meeting regulatory requirements, with a further 16% spending more than 10% of total costs, Eurekahedge said in a statement. The findings are consistent with surveys that AIMA has conducted globally.

Moreover, more than half of the survey’s respondents expect to increase investments in compliance by 2020, and half said they found complying with the raft of post-financial crisis regulations to be costly and complex. 

In particular, Europe’s MiFID II was cited by 36% of respondents as having the greatest impact currently, followed by Basel III (24%), the changes to the Japanese regulator’s inspection regime (20%) and the U.S.’s FATCA (13%).

The survey polled nearly 90 firms representing approximately $375 billion in assets this past April, Eurekahedge said, and either based in Japan or focused on Japan. Asset managers made up around 80% of the respondents, it added. 

Other key highlights from the survey: 

  • Almost three-quarters of investors said they would maintain their allocations to hedge funds and other alternative investments. There was greater interest among investors in newer funds, with 36% saying they would invest within the fund’s first year and a further 39% providing seed funding. Just 8% of investors said they would only allocate to funds with a track record of three years or more.
  • Among allocators to alternative investment funds, the number one reason for making an initial investment was corporate governance, ahead of track record, longevity and other factors. When asked what would drive additional investments, 59% cited strong performance and 33% referred to lower fees.
  • Close to 50% of fund managers said that having “skin in the game” – by investing a significant proportion of their own wealth in the fund – remained the main way of aligning interests with investors. 
  • 31% of the survey’s respondents said the policies of the Trump administration were the most significant geopolitical challenge, followed by China’s slowdown and territorial disputes (20%). 
  • While 42% believed that a financial crisis of the magnitude of 2008 was unlikely to happen this year, 31% felt its chances could not be dismissed with the remaining 27% indicating a neutral stance.

“The annual Eurekahedge/AIMA Japan survey [is] one of the most important sources of dedicated insights into key investor preferences among Japanese investors,” said Eurekahedge head analyst Mohammad Hassan. “Survey results for 2017 point towards a cautious investment outlook, a continued pushback on incentive fees, subdued new fund launch activity and concerns over regulatory compliance related costs. While allocation activity is expected to hold largely steady, survey results indicate reshuffling at the portfolio level in favour of Asia-ex-Japan, North American and European mandates with macro, equity long-short and relative value strategies being the most sought after.”

“The results of this survey demonstrate that the alternative investment industry in Japan is committed to addressing the operational challenges posed by MiFID II and other new regulations,” added AIMA CEO Jack Inglis. “While we support the investments in compliance that the industry is making, we will of course continue to make the case to regulators that the new requirements be applied proportionally, in order to avoid erecting unnecessarily high barriers to entry for new managers.”

“The annual AIMA/Eurekahedge survey makes two very interesting points,” continued AIMA Japan Chair Ed Rogers. “First, despite all of the negative press about hedge funds and the hedge fund industry, over 70% of respondents say they will not be changing their allocations to alternatives in 2017. Second, there is clearly more comfort to allocate to hedge funds at earlier stages of development, with the number of allocators needing a minimum three-year track record falling from 35% to 8%. 

The full survey is available on Eurekahedge’s website upon registration.

Launched in 2001 and headquartered in Singapore, Eurekahedge is the world’s largest independent data provider and alternative research firm specializing in hedge fund databases covering North America, Europe, Asia and Latin America. The company tracks asset flows, hedge fund performance and regional key trends across the hedge fund universe, tracking more than 130 data points on more than 29,000 alternative funds in its database.

AIMA is a global alternative investment industry association with 1,800+ corporate members in more than 50 countries. It is the co-founder of the well-known Chartered Alternative Investment Analyst designation, and its manager members collectively manage more than $1.8 trillion in assets worldwide. 

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