Funds Hub
Money managers under the microscope
From Reuters TV: PB’s fishing, but are Hedgies biting?
In a desperate attempt to win market share, prime brokers are courting blue-chip hedge funds with offers of cheap credit. But are hedge funds biting?
Morning line-up
Hedge fund stories from the past 24 hours from Reuters and elsewhere:
Analysts’ picks beat mutual funds – FT
New kids on the prime brokerage block – WSJ
Citadel gearing up to be the next Goldman? - Seeking Alpha
US hedge fund eyes Gulf opportunities – Reuters
Morning Line-Up
Hedge fund stories from the past 24 hours from Reuters and elsewhere:
Some hedgies still feel effects of 2008 redemptions – Dow Jones
HSBC seeks to fill Lehman void as hedge fund broker – Bloomberg
What investors want from hedge funds now- Business Week
Should hedge funds worry about porous Chinese walls?
Nowadays most hedge fund managers who use leveraged trading strategies such as relative value to exploit pricing inefficiencies employ multiple prime brokers.
If you ask them why, they will generally answer that, post Lehman, having multiple prime brokers is seen as a fundamental part of managing counterparty risk.
However, many hedge funds, especially the high-frequency traders who have come under the spotlight recently, already used multiple prime brokers before the collapse of Lehman.
But two years ago, hardly any of them mentioned counter-party risk. It was almost a non-issue, since virtually no one was expecting a major bank to go down the tubes.
At that time, the most common explanation for having multiple prime brokers was that “we don’t want one broker to know all our trades”.
But why? There is by law a Chinese wall, or a series of them, between a bank’s prime brokerage and its proprietary trading desk.
Surely the hedge funds know that? So the question of the bank’s prop desk potentially front running their trades should not arise, should it?
There are chinese walls between the businesses because otherwise the prop traders could see the order book of the prime brokerage, which would be an enormous advantage for the prop traders as compared to the brokerage’s clients.
In simple terms, if you see a pile of sell orders in the prime brokerage waiting to be executed, it gives you a good idea of which way the market should go, right?
Blowin’ in the wind
The timing of the Alternative Investment Management Association’s hedge fund disclosure initiative indicates just how strong the winds of change are blowing in hedge fund land.
Coming just a day after ECB President Jean-Claude Trichet called the credit crisis “a loud and clear call” for extending hedge fund regulation, the move shows the hedge fund industry feels it must be more active in deciding the future shape of regulation.
The move, which will include regular — probably quarterly – disclosure of systemically significant holdings and risk exposure to national regulators, goes further than that suggested at last month’s Treasury Select Committee by Marshall Wace chairman and Hedge Fund Standards Board trustee Paul Marshall, who had proposed aggregating data through prime brokers.
“The international agenda is starting to gallop away… We can see which way the wind is blowing and we want to exercise leadership,” said AIMA CEO Andrew Baker, adding the proposals had been in the pipeline since early in the new year.
But AIMA’s drive to do this also serves to highlight the low number of funds that have signed up to the HFSB’s voluntary code – a fact seized upon by last month’s Treasury Select Committee.
AIMA is proposing unifying all the industry standards — AIMA, the HFSB, IOSCO, PWG and MFA — into one code. Their fear is that regulators may do this for them.
