Research & Thoughts

Hedge Funds and Dodd-Frank: Institutionalize, Fly Low or Else!

The Dodd-Frank Wall Street Reform and Consumer Protection Act will impose much stricter regulation on the hedge fund industry. The scope of that regulation, how the industry must respond to it, and whether firms will embrace the spirit of the regulation to gain competitive advantage are open questions.

Government rulemaking will provide more answers in the months ahead. But the industry isn’t waiting to act. Despite continuing uncertainty, hedge funds, prime brokers, fund administrators and other service providers are starting to reposition themselves for a vastly different industry landscape and new opportunities, guided by what they do know.

Some funds are looking to grow and consolidate so they can build the scale and infrastructure needed to meet increased compliance demands. Others are weighing whether to shrink their business below asset thresholds set by the act so they can avoid additional taxes and testing and reporting requirements. Some are simply exiting the business. Meanwhile, service providers are assessing whether they have the personnel, processes and technologies to meet the needs of customers facing intensified regulation at both the federal and state level.