US Equity Finance Trends for Hedge Fund and Other Borrowers

Finadium Research Report

Trends in US Equity Finance Costs for Hedge Funds and Other Borrowers

Finadium
April 2009

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Equity financing costs, once seen as an obscure fee charged by prime brokers for borrowing stock, have increased in importance as financing markets go through structural change. Traditional relationships that sustained moderate financing costs for hedge funds have been damaged. Banks can no longer use valuable balance sheet resources to fund lender collateral pools. Following their own collateral losses, lenders are no longer interested in large scale lending for a few extra basis points.

This report is a quantitative look at the costs of securities borrowing in US equities over the last year. We analyze how costs have moved across multiple capitalizations and sectors. Using our recent survey of institutional asset managers as a base, we project how current costs can be an indication of fees to come as assets seeking leverage ultimately recover. We also compare securities lending rates against the interest rates implied in single stock futures pricing.

Smart hedge funds, market makers and other borrowers have been already reevaluating their financing practices. From employing technology that manages their cost of capital to hiring their own equity finance professionals, this is the time for borrowers to get involved. Firms just looking into the situation are behind the game but not all is lost; there will be many opportunities to make, and lose, money in equity finance in the years to come.

This report is 28 pages with 13 Exhibits.

TABLE OF CONTENTS
■ Executive Summary

■ The Mechanics of Securities Financing Costs
– Short Activity in US Equities

■ Hedge Fund Borrow Costs in 2008 and 2009
– Large Cap
– Small Cap
– Sector Analysis: Transportation

■ Alternative Financing Venues
– Comparing Single Stock Futures Interest Rates against
Securities Loan Rates

■ Structural Change in Financing Costs
– Points of Convergence in Custodian and Prime Broker
Securities Lending Rates

■ Securities Finance Strategies for Hedge Funds and Smaller Brokers

■ About the Author

■ About Finadium