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.
“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.
NEW YORK, LONDON AND HONG KONG, Oct. 3, 2019 – Hazeltree, the leading provider of integrated treasury management and portfolio finance solutions, announced today that it has acquired ENSO Financial Analytics (ENSO), a leading provider of portfolio analytics for hedge funds and prime brokers, previously owned by CME Group Inc. (Nasdaq: CME). This acquisition solidifies Hazeltree’s position as the leader in treasury and portfolio finance solutions. IHS Markit (NYSE: INFO), a world leader in critical information, analytics and solutions, participated in the investment, alongside existing investors. Read More
Global Custodian – Hedge Fund Annual – Strategy Games Traditional COO and CFO roles at alternative investment managers no longer exist, as they are now required to be technology, compliance and investor relations experts. ENSO’s Paul Busby and Ted O’Connor discuss the changing landscape and highlight new trends that are empowering these COO’s to adapt.... Read More
Commentary from ENSO, HedgeMark and Man FRM A decade since the financial crisis empowered managed accounts as the institutional go-to structure for transparency, liquidity and control of hedge fund strategies, assetson dedicated platforms continue to grow, driven by convergence, customisation and soon socially conscious investing. Unlike fund administrators, custodians or prime brokers that offer a... Read More