Prime Brokers & Hedge Funds
Prime Brokerage Firms Pressuring Managers
Adding to the challenges of trying to improve the performance of their funds hedge fund managers are now facing additional pressure from their prime brokers. While some funds will simply end up paying more or having to sell off some assets to meet capital requirements others will simply shop around more...further increasing the rate at which hedge funds change primary prime brokers or multi-prime with an assortment of prime brokerage firms at one time.
The survival of a raft of hedge funds is being threatened by fresh pressure to stump up more collateral for trades made in a range of illiquid assets. So-called prime brokers, who provide a range of services to hedge funds, are imposing tougher conditions on their clients and charging more for financing following the collapse of Lehman Brothers in mid-September, raising fears that more funds face collapse.
The more conservative terms mean that a hedge fund would have to put up extra collateral against financing if markets fall further or sell down its holdings. The problem for many hedge funds is that they have already sold down their more liquid investments and are grappling with a wave of redemptions from their own investors. Further collateral requests or higher financing costs may push many hedge funds over the edge.
One hedge fund manager said: "Funding is being withdrawn by prime brokers and funding rates have risen sharply in the past week or two. A tough environment is just getting tougher."
Industry managers are concerned that renewed market turmoil, leading to weaker performance and client redemptions, could lead to a vicious circle of selling by hedge funds.
One prime broker said the situation was "on a knife edge". "Everyone needs to keep their nerve," he added.
He also said that prime brokers were particularly targeting funds that specialised in emerging markets, both in equities and fixed income, as well as in credit and convertible bonds - instruments that can -convert into ordinary shares. Source