Citi report on hedge funds and collateral: modeling an efficient counterparty

Citi Investor Services released a big hedge fund study, “Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization,” the other week. While much of this contains older news, there are two things worth pointing out: Citi’s breakdown of asset manager needs for financing and an illustration of what being an efficient financing counterpart means in practice.

1) What types of asset managers need financing. Citi presents the arguments for convergence of asset managers that has been covered elsewhere but adds this helpful box that lays out the financing or collateral needs of each investment strategy. Good stuff.


2) A model of an efficient hedge fund counterparty. There is substantial talk about prime brokers asking their clients to be “efficient,” but what does this really mean in practice? Citi gives a good illustration of what efficiency means now by showing that if a hedge fund were to move some positions around, all things considered including long and short financing costs, that would improve the PB’s efficiency by 62%. We like these kinds of pictures: they break down a complex topic and make clear that the decision to move assets from one broker to another has real-world implications for the return of the broker, and hence the broker-client relationship. The client may not even know what is really happening behind the scenes, but an easy conversation can yield dramatic improvements. Its important to note that this can be a winner-take-all game: see the reduction in the bp return at other PBs as PB #1’s efficiency increases.


The full Citi report is available here.

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