Sep 17, 2015

European managers feeling the PB squeeze

Large numbers have been re-priced with more to come

Nearly half of European hedge fund managers have faced prime broker re-pricing over the past 18 months with experts predicting more cost increases and difficult negotiations to come.

In a poll of over 150 hedge fund COO delegates at the HFM Operational Leadership Summit in Hertfordshire, UK this week, 44% said they had been re-priced by their PB as Basel III bank balance sheet pressures take hold.

“Traditional primes are looking at their top-tier clients and trying to figure out how to introduce this idea of re-pricing,” one treasury management expert told HFMWeek. “They’re dealing with cash first but we’re expecting the financing thing to come later.”

This expectation is borne out among hedge fund managers, with 78% indicating they will consider reducing the number of primes due to PB pressure on fees and balances.

At some primes, re-pricing is still a last resort, depending on a manager’s strategy, trading book and overall relationship, one European prime head told HFMWeek, with hedge fund managers also recognising it is feasible to run some strategies without a traditional PB.

Experts also tipped custodians to replace some of the PB role if they can provide managers direct access to easy-to-borrow stocks.

Over a third (35%) of managers are expecting to increase the number of financing counterparties as a result of squeezed balance sheet supply, with experts telling HFMWeek some hedge funds are starting to split PB functions such as settlement and finance, while top-tier firms are hiring internal treasury managers to set up their own repo desks.

One third of managers say their investors are concerned with the increasing cost of financing, while nearly 20% are unsure.

On cash management, the allocator community is increasingly focused on what managers are doing with their excess balances.

“We want to see managers on top of their options – we want to see that they have evaluated these and the associated risks,” Gordon Barnes, senior director of operational due diligence at Cambridge Associates said.

Using money market funds (MMFs), buying treasuries or other securities directly, setting up repo arrangements or choosing to sweep excess balances into a custody account are all cash management options, managers have told HFMWeek.

Enso and HazelTree are among those predicting MMFs will be the most likely recipient of excess hedge fund cash, although for some managers the omnibus arrangement of certain products is problematic.

Providers such as Goldman Sachs Asset Management are creating segregated vehicles which allow managers to provide sufficient look-through to their investors, while ETF players such as BlackRock and Source ETFs are also pushing cash alternatives for collateral purposes.