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Hedge funds struggle with running costs

Date: Friday, October 3, 2008
Author: Kris Devasabai, ICFA Magazine.com

Hedge fund managers are spending 45% of their management fees on running their middle and back office, according to a survey conducted by KPMG on behalf of PCE Investors.

KPMG also said 19% of hedge fund revenues are spent directly on operations. Managers polled by the firm said investors are placing more emphasis on the back and middle office, with operational costs higher among managers who served a predominantly institutional client base.

KPMG said the operational costs could become an acute problem for teh industry, with 10% of hedge funds already unable to cover their costs with management fees.

Andrew North, principal advisor, investment management, at KPMG said growing operational costs were driving hedge fund managers to look for variable cost models geared to activity or performance. "Outsourcing can achieve this and give managers the freedom to 'stick to their knitting' and concentrate on performance," North said. "The portfolio of services managers are comfortable outsourcing is expanding; moving from traditional fund administration and IT, into the middle and back office as well as business support functions such as compliance."

George Cadbury, president of PCE Investors, which commissioned the research, said: "The landscape of managing a hedge fund business has become more complex. Investors are now driving the need for pertinent risk controls, efficient operational systems and studious compliance in a way that has not before been witnessed. Managing the associated costs, however, are as important as managing the portfolio."