The Alternative Investment Management Association (AIMA) has launched a joint survey to discover how ready hedge funds are to the changes Basel III will have on relationships with their prime brokers.
Many of the largest prime brokers, such as Barclays, Credit Suisse, Bank of America, Deutsche Bank and J.P. Morgan, are shrinking their prime services division and cutting less profitable clients in the wake of increased capital requirements.
This has led to many hedge fund clients at the mercy of these cuts, in which the leverage ratio and the liquidity coverage ratio (LCR) in Basel III are forcing prime brokers to review their hedge fund relationships, and are becoming much more selective over what parts of the portfolio they finance.
Hedge funds rely on banks to provide leverage, offer securities loans and finance their trades.
“It is clear that many hedge fund management firms are struggling to see how these capital requirements will affect the cost of doing businesses,” says Jack Inglis, CEO, AIMA.
“With this survey, we are hoping to cut through some of the noise and better understand what managers have seen so far and how they expect their relationships with their prime brokers and other financing counterparties to change.”
A survey conducted by State Street in October last year found that of 235 hedge fund executives, only 29% see Basel III significantly increasing the cost of financing, while 42% disagreed with the notion and another 29% were unsure. In addition, when asked whether Basel III will significantly change the way their firm manages its service providers, 37% disagreed and 26% were unsure.
The survey, alongside financial analytics provider S3 Partners, also aims to establish definitions for fundamental concepts such as ‘optimisation’, ‘collateral management’ and ‘reconciliation’.
“Hedge funds and asset managers should be used to hearing their counterparties speaking about return on assets, optimisation and collateral management, but the surprising thing is that there’s still no industry-wide understanding of what exactly these concepts mean,” says Bob Sloan, CEO, S3 Partners.