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Rehypothication Risks

Rehypothication Risks, Rights & Costs

Here is a short article about the Rehypothication by prime brokerage firms, the definition of it, the risks of prime brokers using the strategy, the rights of hedge funds who loose access to their assets and what happens to the cost of prime brokerage services when hedge funds request for their assets not to be rehypothicated.

Here is a short excerpt from the article:

The dangers for hedge funds of having their assets rehypothecated became painfully clear last week: $22bn of the $40bn held by Lehman’s European prime brokerage had been rehypothecated. Hedge funds trying to reclaim the rehypothecated assets have found themselves in the queue of general creditors, likely to get back only a proportion of their money.

Even those hedge funds which had insisted they did not want their assets rehypothecated – such as Amber and a small RAB Capital fund – face a long and potentially painful wait to get back securities held in segregated client accounts. PwC, administrators of Lehman’s London business, have told hedge funds it is likely to take months to calculate how much is due to whom, and to offset this against debts.

But it is rehypothecation which poses the biggest threat to hedge funds, and could lead to the biggest changes in the prime brokerage industry. The main prime brokers were almost completely self-funding, according to current and former executives, needing very little access to the balance sheet of their parent bank, thanks to hedge fund cash kept on deposit and the rehypothecation of assets.

Most of the cash has already gone, hedge fund managers say, shifted away from prime brokerages to banks regarded as safer. Take away rehypothecation, and banks will have to borrow at far more expensive rates in order to lend to hedge funds, pushing down their profitability and pushing up the cost of borrowing. Read more...

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