Demand is rising among hedge fund managers in Asia for experts to tackle the growing volume and complexity of regulatory, legal and compliance requirements*. In the past, only the largest firms would have in-house staff in this area, but that is changing fast.
“Anyone with a compliance background in the region and hedge-fund experience is getting snapped up”, says the general counsel at a big Hong Kong-based hedge fund manager. “This is a hot area. If you talk to the talent management guys at prime brokerages, they can’t fill demand right now.”
There is an increase in both local regulation in Asia – such as Singapore’s new fund manager regime – and international requirements, such as the US’s incoming Commodity Futures Trading Commission rules and Foreign Account Tax Compliance Act (Fatca).
That’s not to mention greater scrutiny and prosecution of insider trading and other market abuse in jurisdictions such as Hong Kong. Moreover, Japan is expected to introduce tighter rules and enforcement on insider trading in the next year or so.
“It’s like drinking water from a fire hose,” says the unnamed general counsel. “I spend 25% of my day tracking regulatory changes; it’s information overload.”
Small players managing up to, say, $100 million won’t hire in-house regulatory staff, but more of the larger firms are doing so, he adds. “If you want institutional-grade infrastructure and to raise money from the US, this is a box you need to tick.”
He cites two main reasons for this: the need to track and forecast regulatory changes and the increased volume of regulatory reporting.
It’s not just the big, obvious pieces of legislation that cause issues. Every small piece of ground needs to be covered to ensure something important isn’t missed and the commercial and operational implications on the business are well understood.
As for regulatory reporting, different forms are required for different jurisdictions, and each one may require a huge amount of data points and run to hundreds of pages, notes the counsel.
Prime brokers make similar points. Henri Arslanian, director of business consulting services for prime services at UBS in Hong Kong, sees increased demand for legal and regulatory talent in Hong Kong and Singapore. He sees this as positive as it shows the industry is becoming more “institutionalised”.
Arslanian cites as drivers of this trend both the volume of regulatory changes and an increased focus by investor operational due-diligence teams on how hedge funds keep up with the new requirements.
Last year a typical Hong Kong-based hedge fund with US investors was only licensed with the territory’s Securities and Futures Commission, he notes. By the end of this year, it will be not only licensed with the SFC but also registered in some form or other with both the Securities and Exchange Commission and the Commodity Futures Trading Commission in the US.
That’s not to mention many other developments in recent months, such as recent short-position reporting regimes in Hong Kong and Korea or tax developments in India and Taiwan.
Having a dedicated legal or compliance function would take the pressure off the COO, who would “wear the general counsel hat” at most Asian hedge funds, says Arslanian, and for whom these duties are becoming increasingly time-consuming. Having someone in-house would also save on ever-growing fees paid to compliance service providers and law firms.
Jane McBride, a partner in the financial services practice at law firm Deacons (which provides compliance services), says she encourages clients to build an in-house compliance team. This does not eliminate the need for external advice, she adds, but facilitates proper management of the process.
Moreover, under Singapore’s new fund manager regime, an in-house compliance function will be mandatory in certain situations, notes McBride, which may encourage Hong Kong to also take a more stringent approach.
Perhaps not surprisingly, the number of firms offering compliance services in Asia is also on the rise. ACA Compliance and Kinetic Partners both set up in Hong Kong this year and Optionality Consulting opened in Singapore last year. They join existing providers in the region such as ComplianceAsia, CompliancePlus, Corporate Support and Deacons.
* A full feature on hedge fund regulation and compliance will appear in the forthcoming (October) issue of AsianInvestor magazine.