Look, I can't imagine anybody on here agreeing with me on this, but I don't think the compliance costs the came from Dodd-Frank are worth it. I'm not trying to argue absolute "rights", but rather the fact that industries shouldn't be regulated unless it is absolutely necessary to do so.
Specifically, hedge funds with $150 million in Regulatory Assets Under Management (assets * leverage ratio) are required to file a form PF. Hedge funds with $1.5 billion have to filed a form PF quarterly. This is in addition to submitting an ADV form to the SEC. The purpose of the form PF is to let the FSOC see the composition of assets in the funds to designate them for
additional risk monitoring. Although the SEC estimated the compliance time of these forms at around 50 hours, several firms I've spoken to have said their compliance times are north of 70 hours.
Also, Europe had adopted Annex IV for private funds, which asks many of the same questions as Form PF. However Annex IV used a different methodology for calculating leverage. This means that hedge funds with offices on either side of the Atlantic will have to take their data imputed into one form and recompute it to adjust for the leverage difference, instead of simply copying it, for the thousands of questions asked.
Proponents of designating hedge funds as a SIFI are quick to point out to the collapse of LTCM and act like that's the norm, and not the exception. However what they fail to realize is that industry has changed a lot since the 90s. For one thing unconstrained convergence trading is no longer used as much as many quant funds have discretionary overlay in the form of mandates to the traders that they unwind their positions if there isn't a certain payoff in a specific time frame. Secondly, with the institutionalization of the hedge fund industry, many allocators are either going through consultants or going through a fund-of-funds or a managed account platform. This means that greater constraints are being placed on the managers by the investors.
As proof of this, over 1000 hedge funds failed in 2008-2009, and not a single one needed to be bailed out. If anything hedge funds can actually exert a stabilizing effect on the economy. This is because they tend to be actively managed strategies, which have significant cash holdings and short positions. As a result, they counteract the market cycle by outperforming during down periods and lagging behind in bull markets:
If a hedge fund fails, only institutional investors (those with assets of at least $1 million and incomes of at least $250,000) are affected, not retail investors. This legal structure is the whole reason why hedge funds are
supposed to be lightly regulated.
And really, what did they have to do with the financial crisis of 2008? Hedge funds aren't in the business of home loans or securitization, they develop trading strategies on existing securities.