June 2013

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Whether due to rising capital costs or the shift in derivatives trading to centrally cleared platforms, regulation is going to change the way prime brokers and hedge funds do business. This is now apparent in how hedge funds think about leverage, how they strategize about using bank balance sheets and what they expect from their prime brokers in the coming years.

A new survey by Finadium looks at hedge fund opinions on leverage, equity financing, repo and OTC derivatives. Each section of the report provides collective and anecdotal evidence on the current opinions and projected actions of hedge fund managers.

We also heard from hedge funds on their attitudes towards prime custody as a prime brokerage alternative and other areas of future competition for prime brokers. While an apples-to-apples cost comparison for these services remains elusive, funds recognize the areas where prime custody adds value and where they would prefer to see services kept separate.

Given the outsized importance that hedge funds have in financial markets relative to their assets under management (AUM), changes in hedge fund leverage and investment strategies will impact broad swaths of financial market activity. The results of our new survey suggest strategic directions for hedge funds, prime brokers, their service providers and other participants in securities financing and asset servicing markets.

This report is 32 pages with 13 exhibits.


■ Executive Summary

■ Changing Dynamics in Hedge Fund Financing
– Methodology

■ Equities
– The Cost of Margin Financing

■ Derivatives and Collateral
– Collateral Management

■ Repo and Fully Paid Securities Lending

■ Thinking About Prime Custody
– The Convergence of Prime Brokerage and Prime Custody

■ Balance Sheet Needs and Prime Brokerage Relations Into 2014
– Exchange-based Leverage
– Limits on Balance Sheet Access
– The Health of Prime Brokers

■ About the Author

■ About Finadium


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