A survey from the Alternative Investment Management Association (AIMA)and S3 Partners, a data, analytics and services firm, finds that Basel III reforms have fundamentally changed how asset managers are connected to the financial system, with hedge funds challenged to understand expense, usage and access to the financing power grid.
Jack Inglis, CEO of AIMA, says: “There is no doubt that the Basel III banking standards are having a significant impact on hedge funds and other alternative asset managers. Financing costs are rising and the fund manager / prime broker relationship is changing fundamentally. It is our hope that this timely and important report will provide clarity and direction to those who have felt the impact of the recent regulations, and to give context to issues that are being felt across the industry.”
Bob Sloan, CEO of S3 Partners, says: “New bank capital regulations are creating downstream financing challenges and opportunities for asset managers and
hedge funds. The survey clearly shows how plugging into the financial power grid is getting more expensive.”
“Managers of all shapes, sizes and strategies now seek to answer the question: How can we maintain access to the grid, while optimising for the right amount of efficiency? As the survey results show, access to unbiased data, comprehensive Return on Assets/Return on Equity analytics, and a common language are critically important towards determining fairness – as rates, margin,spreads and contracts will be a key determinant for an asset managers’ success.”
The survey of fund managers worldwide found that financing costs have risen for 50 per cent of firms, with an even split between those who quantify the level of cost increase as being greater than 10 per cent and below 10 per cent.
Some 75 per cent of firms expect further cost increases over the next two years and the impact is consistent regardless of a fund manager’s size, investment strategy or location.
Fund managers responding to the survey said they are having to rethink their prime brokerage relationships due to Basel III. Some 75 per cent have been asked to change how they do business with their prime brokers, while more than 67 per cent have had to cut the amount of cash they keep on their brokers’ balance sheets.
Importantly, the survey found that most alternative asset managers over the last two years have either maintained or increased the number of prime brokers they use, with the average number of financing relationships found to be four.
“Only 20 per cent of fund managers have a clear understanding of how their prime brokers calculate their worth in terms of the revenue they provide relative to balance sheet impact, known as “return on assets” or RoA. Fewer still have the data necessary to calculate this themselves,” according to the survey.
The survey believes that hedge fund managers can put themselves in a stronger position to deal with the changing nature of the prime brokerage relationships.
The survey recommends that to maintain access to the “grid” of financing, manage their overall cost of doing business, and optimise the mutual value of their prime brokerage and counterparty relationships within the new regulatory landscape, hedge funds and other investment managers must increasingly make sure they have the right data, including unbiased data sources; Use a different set of analytic tools and calculation; Make sure that they and their financing counterparties are speaking a common language to promote beneficial financing relationships and effective collateral management activities.