Nearly 30% of hedge fund managers faced fee increases from their prime brokers while an almost equal number said they anticipated price increases to occur over the next year, according to a survey by Ernst & Young (EY).
Those most impacted by the prime brokerage fee increases tend to be managers running illiquid or highly leveraged strategies. The EY study found 41% of distressed debt managers and 32% of fixed income/credit managers had their prime brokerage fees increased. However, just 4% of quantitative long/short managers faced price increases.
“Those first reporting increases are managers who have a combination of balance sheet intensive strategies and trading in products that are traditionally not as profitable for prime brokers. On the opposite end of the spectrum, quantitative and equity long/short strategies appear to have been spared in this initial re-pricing as they tend to trade higher volume, high-quality liquid assets that result in lower net balance sheet exposure and/or greater internalization/optimization for the prime brokers,” read the EY survey.
Basel III capital requirements are forcing prime brokers to scale back on servicing certain balance sheet intensive hedge fund strategies. A number of bulge bracket banks including Goldman Sachs, Bank of America Merrill Lynch and Credit Suisse have terminated hedge fund relationships or increased fees for managers which have not grown their assets or failed to deliver decent returns.
85% of distressed debt managers and 84% of fixed income/credit managers said they had altered the way in which they traded, said the EY study. “Whether it be moving toward swap-based trade execution, reducing repo financing or an overall reduction of leverage, managers of all strategies are having to make hard decisions about whether certain trades make sense given the associated costs,” read the study.
A number of prime brokers have urged hedge funds to work with fewer providers if they wish to retain the relationship in what is likely to irk institutional clients. However, the EY study found 30% hedge funds had increased the number of prime brokers they use.
Given the restrictions around financing, it was hypothesized that hedge funds would seek alternative financing sources, such as from private equity or other hedge funds. Nearly a quarter of $10 billion plus managers have sought to diversify their financing sources compared to 8% of sub-$2 billion managers.
Hedge fund prime brokerage fees on the up
Nearly 30% of hedge fund managers faced fee increases from their prime brokers while an almost equal number said they anticipated price increases to occur over the next year, according to a survey by Ernst & Young.