The number of hedge fund assets available for prime custody services have increased by 40% since 2010 to an estimated $684 billion, according to joint research by consulting firm Finadium and BNY Mellon.
Prime custody refers to tailored servicing of unencumbered assets within alternative investment portfolios, performed by both prime brokers and custodians to provide greater transparency and risk mitigation. Roughly half of all hedge funds with more than $1 billion in AUM are now thought to have a prime custody agreement in place, up from 15% in 2008 as funds increasingly seek to mitigate counterparty risk, said BNY Mellon in a press release.
BNY Mellons prime custody platform segregates and holds assets off the custodians balance sheet. The company has alternative assets under administration and custody of more than $525 billion, including over $155 billion of prime custody assets.
Its new report, Prime Custody Comes into the Spotlight, outlines prime custodys growing importance to hedge funds and how global custodians are supporting this market. The paper also analyzes the structural changes that are fueling growth, including an increase in fully paid/unencumbered assets such as investments in financial products which themselves contain built-in leverage and a heightened awareness among institutional investors of potential counterparty risk.
Hedge funds are putting far more emphasis on how they manage custody of their assets and increasingly looking to adopt best practices to ensure their counterparty risk profiles are optimized and meet investor requirements, said Marina Lewin, managing director at BNY Mellons Alternative Investment Services business. BNY Mellon works in partnership with its extensive network of prime brokers, so clients maintain their current prime broker relationship but have the added benefit of holding their assets with an independent third-party custodian.”
(JDC)