Dealing with the US Foreign Account Tax Compliance Act (Fatca) may be relatively less expensive for hedge funds in Asia compared with their Western counterparts, given their typically smaller size and correspondingly fewer number of investors.
Fatca-related costs are “driven by the number of investors that you’ve got to deal with,” says Jim Calvin, Deloitte’s Asia-Pacific regional leader for Fatca, speaking at the AdventConnect event in Hong Kong this week.
“If you have a few investors and many of them are institutional, they are likely to have to comply with Facta themselves. They’ll have to give you a number and you’re done with them,” says Calvin.
Foreign financial institutions which have gained "deemed-compliant" status by the US Internal Revenue Service (IRS) are given a so-called FFI identification number which relieves them from Facta obligations.
Expected to be introduced in 2014, Facta will force all global financial companies to report details to the IRS of any clients linked to the US with more than $50,000 in an account.
In pre-crisis times “compliance was getting your tax returns filed on time”, says Calvin. “Now it has become an overwhelming effort for every hedge fund.”
However, for hedge funds with a few hundred investors, the process should be less complicated than those with thousands. “I think the expense is lower [as] the approach is probably different,” says Calvin.
While there is an expectation that smaller funds may need to dedicate more resources to compliance, the biggest Fatca-related infrastructure investment will likely be borne by the prime brokers.
A survey of hedge funds globally shows that the cost of business has increased for 58% of US managers, compared with 44% for their Asian counterparts, which typically manage less AUM.
The results of the Global hedge fund and investor survey 2012, released this week by Ernst & Young, indicate that costs have remained the same for 44% of Asian managers, with 12% seeing a decrease in costs.
Changes in the regulatory environment have driven up costs in the US and primarily relate to spending on additional infrastructure, says Ernst & Young.
However, Asian hedge funds will not fully escape additional costs related to Fatca, says Henri Arslanian, director of business consulting services in Asia-Pacific for UBS prime services.
“There is no doubt that the fees of compliance with these set of regulations are going up for hedge funds,” says Arslanian.
Most of the costs will be bundled in the cost of doing business, such as hedge fund administration fees and legal fees for investor-related documents.
Increased costs related to regulation will also be incurred by institutional investors. Yet according to the Ernst & Young survey, 49% do not believe that increased regulation will protect their interests, with only 2% believing they will be effective in preventing a financial crisis.
“I don’t see the regulations being helpful at preventing the next crisis because crises are unknown,” says a North American investor in the survey. “Regulations are basically meant to solve last year’s wars.”