Higher costs and changing cost structures will lower investment returns for hedge funds and other institutional investors, according to the latest report from Finadium that evaluates technologies and trends in cost of capital management.
The report states that increased hedge fund assets under management (AuM) and competitive returns are driving more attention toward the cost of capital management for both hedge funds and their prime brokers.
In 2007 and 2008, hedge fund managers reported that cost of capital management was not much of a consideration given the returns they were making, Finadium writes. Going forward, however, any amount of leverage with lesser returns points to more financial controls at trading.
The move to Basel III rules for reporting capital is causing banks to sharpen their sensitivities, meaning hedge funds, mutual funds and insurance companies that depend on banks for financing and swaps trades will be forced to become more sophisticated about how to minimize their fees, the firm says.
A number of service providers have launched or acquired cost of capital management products to address investor concerns recently, according to Finadium. Those in the space include SunGard, Lombard Risk, Advent/Syncova and ConvergEx Group. The firms appear to be segmented between the ones that focus on tools for trading and automation (Sungard, Lombard Risk) and tools that focus on analysis and relationship management (Advent/Syncova), while ConvergExs newest offering could sway one way or the other.
No one product performs all aspects of cost of capital management, Finadium says in the report. This leads to market segmentation and opportunities for multiple vendors.
(CG)