02/10/17

Hedge Funds Come Together to Share Cost of MiFID and Research

•          Funds are joining platforms to share rising cost of MiFID II
•         Being up to speed on rules costs $25,000-plus a year: Privium

With MiFID II looming, hedge funds are concluding there’s strength in numbers, reports Bloomberg.

Smaller money managers are increasingly clubbing together on platforms to share the costs of the European Union’s regulatory overhaul and get help with the paperwork and legal hurdles of compliance. With three months to go before the rules take effect, Joe Vittoria of Mirabella Advisers says his platform has “never been busier,” while Michael Williams of Brooklands Fund Management reports a jump in demand for the “economies of scale” his firm offers.

Platforms are packages of applications and services that firms can tap into to lower administration costs. They take many of the bread-and-butter aspects of business out of the hands of investment managers, leaving them free to focus on making money. That makes them useful for hedge funds, which are having to deal with the revised Markets in Financial Instruments Directive just as they struggle with high start-up costs, lackluster returns and an investor exodus.

Whether to join a platform “wasn’t even a question,” said Samuel Gruen, founder of Lightfield Capital in London. He launched his hedge fund via Brooklands Fund Management last year with $20 million of assets.

“The industry is changing and 2 percent management fees aren’t happening anymore,” Gruen said. Even if it’s rarely the sole factor in prompting hedge funds to band together, MiFID II is “an extra cost and hassle,” he said.

Getting Started

Platforms can help mitigate these costs. Start-up costs for a hedge fund in Europe are at least $500,000 and can go as high as $2 million for certain strategies, according to Clayton Heijman, chief executive officer of the Privium Fund Management BV platform in Amsterdam.

Heijman said it costs “at least $25,000 a year just for a manager to be up to speed on the MiFID II rules,” and that this “doesn’t include the research costs.” From Jan. 3, hedge funds and other clients will have to pay for research reports separately from broking commissions, with prices quoted by banks ranging from thousands of dollars to hundreds of thousands.

Platforms can also hire administrative staff to deal with the new regime’s more onerous reporting requirements and give smaller money pools extra bargaining power. Sometimes they charge a fee for their trouble; other times, particularly in the case of hedge-fund start-ups, they take an equity stake.

Being part of a group aggregating dozens of managers and billions of dollars in assets means banks “are at least not going to ignore you,” said Vittoria, CEO of Mirabella in London. It helps “in terms of being able to negotiate,” he said.

More hedge funds are getting on board. Mirabella is in the process of signing up five new clients, which should be in place by mid-November and which will boost the number of funds on the platform to 32, Vittoria said. That’s up from 17 two years ago.

“Regulatory change and the complexity of it has always been a feeder for fund-platform businesses,” he said. “We’ve never been busier and it’s probably true for a lot of the other platforms.”

The barrier to market entry is “so high” for hedge funds these days, “and MiFID II -- which is onerous because of the research, the trade-reporting and record-keeping -- adds to that,” said Williams, founding partner of Brooklands in London.

“We’re definitely seeing an increase in activity,” he said.