Hedge fund customers, generally regarded as the most hazardous financial operators, are questioning the creditworthiness of their prime brokers, the Financial Times reports.
Some of the worlds biggest hedge funds have reviewed agreements with their bankers, assessing whether assets and cash left with the prime brokers are safe. Hedge funds, bankers and advisers say this has seen a shift in assets away from those banks regarded as riskiest following multi-billion dollar write-offs, the FT reports.
It is quite paradoxical, says Angelos Metaxa, director of CM Advisors, a $3 billion Geneva-based fund of hedge funds told the FT. In August, everyone was worried about a hedge fund blowing up, but now they are worried about a bank blowing up and taking a few hedge funds with it.
Hedge funds rely on prime brokers to provide financing and to act as custodian for their investments. But their exposure if there was a collapse depends on how their agreements are structured. So-called rehypothecation when legal ownership of the assets rests with the bank, rather than the hedge fund is now being re-examined by the funds, the FT reports.
The move is being accelerated by pressure from investors, many of whom have begun to question the managers of the funds they invest in about the risks they may be running, the FT reports.
Prime brokers of big-name banks, including Barclays Capital and Credit Suisse, are using their position as part of commercial banks as a marketing tool, while other brokers that were not hit by the sub-prime crisis benefit from the worries. Other prime brokers are fighting back with detailed explanations for funds of their financial strength and guarantees that protect their money in the event of failure, the FT reports. In many cases, hedge funds are given the choice of keeping their assets segregated, so they are completely safe, or switching them to the prime broker s name and getting a discount.