Managers double down on PB against rising costs
10 November 2015 London
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Hedge fund managers are increasing their prime broker relationships despite a squeeze on margins caused by new regulation, claims an Ernst & Young survey.
The knock-on effects of Basel III and the US Dodd-Frank Act’s new capital requirements for banks are putting increasing pressure on hedge fund managers, which are ultimately bearing the burden through transaction fee increases.
Fees have already increased for 29 percent of the survey’s respondents and a further 22 percent expect their fees to go up within the next year.
The study also showed that 60 percent of managers affected by re-pricing have in fact added more prime broker relationships, compared to only 12 percent that reduced their prime broker relationships due to fee increases.
Ernst & Young’s 2015 Global Hedge Fund and Investor Survey cited the regulations as key drivers forcing banks’ prime brokerage businesses to “focus more closely on liquidity, balance sheet capacity and funding”.
Ernst & Young stated in its report on the survey: “The respondents now expect price increases and broker limitations to change the way they trade, including moving toward swap-based trade execution and reducing repo financing and overall leverage.”
From a prime broker’s perspective, potentially balance-sheet intensive strategies such as fixed income and distressed credit were among the most likely to experience price rises.
Many prime brokers are now more reluctant to hold cash for hedge funds because of how balances are classified toward banks' capital reserves under new regulations.
Fifty-eight percent of hedge fund managers have moved cash to custodians as a result, while 35 percent have purchased highly liquid securities as cash alternatives.
Natalie Deak Jaros, Americas co-leader for hedge fund services at Ernst & Young, explained: “Many hedge fund managers are larger and more complex, with increased financing needs.”
“As many prime brokers have less capacity to offer than in the past, hedge fund managers are increasing the number of relationships they have to reduce counterparty capacity risk.”
The knock-on effects of Basel III and the US Dodd-Frank Act’s new capital requirements for banks are putting increasing pressure on hedge fund managers, which are ultimately bearing the burden through transaction fee increases.
Fees have already increased for 29 percent of the survey’s respondents and a further 22 percent expect their fees to go up within the next year.
The study also showed that 60 percent of managers affected by re-pricing have in fact added more prime broker relationships, compared to only 12 percent that reduced their prime broker relationships due to fee increases.
Ernst & Young’s 2015 Global Hedge Fund and Investor Survey cited the regulations as key drivers forcing banks’ prime brokerage businesses to “focus more closely on liquidity, balance sheet capacity and funding”.
Ernst & Young stated in its report on the survey: “The respondents now expect price increases and broker limitations to change the way they trade, including moving toward swap-based trade execution and reducing repo financing and overall leverage.”
From a prime broker’s perspective, potentially balance-sheet intensive strategies such as fixed income and distressed credit were among the most likely to experience price rises.
Many prime brokers are now more reluctant to hold cash for hedge funds because of how balances are classified toward banks' capital reserves under new regulations.
Fifty-eight percent of hedge fund managers have moved cash to custodians as a result, while 35 percent have purchased highly liquid securities as cash alternatives.
Natalie Deak Jaros, Americas co-leader for hedge fund services at Ernst & Young, explained: “Many hedge fund managers are larger and more complex, with increased financing needs.”
“As many prime brokers have less capacity to offer than in the past, hedge fund managers are increasing the number of relationships they have to reduce counterparty capacity risk.”
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