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European hedge funds pay ‘premium’

11 December 2013

Hedge fund managers in Europe have bigger costs and regulatory worries than their US counterparts, according to new research

Read more: Europe hedge funds US Asia

The gap between European and US hedge funds is widening, according to a new survey by Citi's prime finance business.

European hedge funds are paying a "premium" running their firms, the 2013 Business expense benchmark survey found. Their management company costs appeared to be higher than the same charges being realises by US firms.

Hedge funds with $100m, $500m, $5bn and more than $10b AuM are paying a premium of at least 20% in expenses compared to their US counterparts.

Marketing costs account for "significantly more" of a management company's total expenses in Europe than in the US at nearly all major AuM levels.

When the survey looked to Asia Pacific, it found managers based in this region faced lower company expenses than their US and European counterparts. Asia survey respondents were only small-sized firms with AuM of $100m, $500m and $1.5bn, but in each case these firms were being run at a "substantial" discount to similarly-sized firms based in the US and Europe.

Aside from costs, the survey found that European managers were more concerned than their counterparts about the impact of regulations on their business. They said that registration, compliance and reporting rules in the US and Europe would have a severe impact, and that new OTC derivative rules and Fatca would have a moderate to significant impact.

Interestingly, European managers were more concerned about US regulation than US-based managers.

Hedge fund managers are particularly concerned about the patchwork quilt of rules emerging under the EU Alternative Investment Fund Managers (AIFM) directive. Some market participants fear that non-European hedge funds are likely to be deterred from operating in Europe.

A US-based hedge fund manager that does business in Europe recently told Global Investor/ISF that it was trying to find a way to avoid having to meet the requirements of the AIFM directive.

When looking across all regions, the survey found that managers need at least $300m AuM to break even and that firms with lower AuM would not be able to cover their management company costs without additional capital or incentive fee payouts.

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