By Rob Starr, Content Manager, Big4.com

According to Ernst & Young’s sixth annual survey of the global hedge fund market, Finding Common Ground, despite increasing regulatory requirements for hedge funds, only 10% of investors feel that regulations effectively protect their interests, and 85% of investors do not believe these requirements will help prevent the next financial crisis.

Managers will need to commit time and resources to understanding and complying with various regulatory requirements. Managers are already seeing regulations increasing their costs in prompting upgrades of compliance functions (34%) and technology dedicated to reporting (17%). Although investors expect these additional compliance costs, they fear these expenses will be passed on to the funds.

In 2010, 94% of managers felt risk and performance were effectively aligned with investor objectives, while 50% of investors felt the same, according to Restoring the Balance, Ernst & Young’s 2010 survey of the global hedge fund market. In 2012, 87% of managers feel this is true, while only 42% of investors agree. In addition, more than two-thirds of managers say that their compensation structure has not changed in the past three years – just 14% say that less is paid in cash, and just 10% say that compensation is subject to longer deferral periods. Investors, by contrast, say less than 40% of compensation should be paid in cash; they would like to see a larger portion paid in equity and deferred cash, subject to clawbacks.