Investment banks are responding to rising credit concerns by imposing tougher lending terms on hedge funds, in a move that threatens to exacerbate investor unease in the financial markets, The Financial Times reports.
Prime brokerage departments at several investment banks have raised their margin requirements for certain hedge fund clients as they seek to insure themselves against the possibility of new hedge fund collapses as a result of the recent market turmoil.
“Financing terms for hedge funds are being tightened and this is forcing a further deleveraging of risk across global markets,” says Gerald Lucas, senior investment adviser at Deutsche Bank. “Recently we have broadened our stricter standards to funds beyond those with exposure to US mortgage market. I’d say this is now a pretty broad-based retreat from leverage.”
The move could raise the pressure on parts of the hedge fund sector, since it comes at a time when performance at some groups has slumped as a result of recent market swings.
The average hedge fund, across all strategies, returned just 0.8 per cent in June, down from 2.3 per cent in May, according to Credit Suisse Tremont. Fixed income-focused hedge funds were the worst affected, returning just 0.2 per cent in June.