We took a recent look at our 2012 report with BNY Mellon Prime Custody and wanted to know what the data looked like at the end of 2013. Our findings are below.
In August 2012 we found US$684 billion in hedge fund assets that were net long and potentially available for prime custody. In December 2013 we see US$601 billion, a decrease of 12%. This is in comparison to a rise in hedge fund assets of 11%, excluding funds of hedge funds.
Our definition of prime custody eligible assets was any assets bought long, whether they themselves had inherent leverage or not. Assets encumbered due to margin or collateral requirements were excluded.
Through 2013 we saw an increase in hedge fund leverage reported in the press and by prime brokers. If we ran this analysis in mid-2013 we would have shown a decrease of prime custody eligible assets of some 27%, based on the current AUM. Today, although NYSE margin debt has been over $400 billion (higher than in 2007), prime brokers say that their hedge fund borrowers have pulled back a bit from earlier highs. As a result, we put our estimate of available long-only assets at 30% of total hedge fund holdings. This is on an aggregate basis globally across all hedge fund asset classes. We’d welcome any feedback on whether this number is high, low or on the mark.
The one big difference in this analysis vs. 2012 is that the UK’s Financial Services Authority, which ran a hedge fund study that we used for an input on leverage, no longer exists. We gathered our data for this study from a combination of public and private sources. In the future we hope to use IOSCO’s hedge fund survey as an input, but that study has some definitions that we were uncertain about relative to the FSA’s older work. We will look to this survey next year for year over year reference points.
We’d also note that our definition of Prime Custody is limited to hedge funds operating as hedge funds, not mutual or UCITS funds, or other investors who run long/short portfolios. Those assets could also need prime or enhanced custody, or self-lending types of services, but were not included in 2012 or in this current analysis.
Last year when we looked at the data we expected hedge fund leverage to remain about constant. At the same time, we got the increase in hedge fund assets about right. As a result, we were seeing an increase of 11% in prime custody eligible assets, not a decrease. The run up in equity markets reversed this thesis.
The Finadium/BNY Mellon report from 2012, Prime Custody Comes Into the Spotlight, is available here.