Hedge funds’ search for alpha comes with a hefty price tag, according to the TABB Group, as prime brokerage spending has zoomed to $10 billion a year, while investment in market data and technology needed for the search hit more than $1 billion. Explaining the surge in spending, study co-author Adam Sussman said in a statement, “The bigger drive is the notion that complexity creates inefficiency, and within inefficiency lies alpha.” Sussman continued, “The manager who can cut through language and cultural barriers, local regulations and disparate accounting conventions will be able to locate good idea on a global basis.”

In its second annual study on hedge funds, TABB also found that compliance costs over the past half decade have topped $500 million, nearly quadruple the amount the Securities and Exchange Commission had estimated.

Among other results, TABB found:

• Hedge funds in the U.S. spend an estimated $432,000 a year for data on each fund.
• About one in three say they expect to improve front-office technology by 2007.
• Hedge funds with six or more relationships are consolidating most of their businesses with fewer prime brokers, while about 50% say they are considering adding a broker or switching to a new one.
• HFs expect total assets from pension funds to rise from 15% this year to nearly 20% in 2008.
• About half of respondents were not concerned with SEC registration, but those that were spent between $64,000 and $374,000 for the registration process depending on fund size. The SEC had estimated $45,000.