U.S Hedge Funds can save millions as new rules threaten cost escalation

U.S Hedge Funds can save millions as new rules threaten cost escalation
11th October 2018 Maxime Jeanniard

Hedge funds facing perplexing regulations can make significant margin savings.

According to our new findings, a hedge fund moving 10 positions between dealers can save a huge 25% in initial margin – which equates to hundreds of millions of dollars. These savings free assets for fund managers to scale up positions to drive additional returns. The findings will come as welcome news to hedge funds who can now be charged a staggering 70% additional margin because of regulatory changes, crippling returns as a result.

The rules, such as those forced upon clearing houses by the Committee on Payments and Market Infrastructure (CPMI) and the International Organisation of Securities Commissions (IOSCO), mean fund managers have no choice but to rethink their strategies. The requirements, known as liquidity or concentration add-ons, force all major exchanges to charge additional margin for large positions. Eurex first implemented this feature, and other venues, including the likes of the CME and ICE, will also have to charge additional margin under the rules.

Commenting on the findings, our CEO, Peter Rippon, said: “A decade on from the biggest financial crash in living memory, making fund managers post more cash sounds great in principle. But in practice, these rules trigger a monumental cost for the industry, which ultimately, will be shouldered by the very end investors regulators are trying to protect.”

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U.S hedge funds most affected by new margin rules are those looking to exploit price differences between two related markets, like bonds vs futures. A firm like this may have to post significantly more margin for a very large position. The challenge is that understanding the specific nuances of new margin models requires significant investment at a  time when fund managers are more and more cost conscious.

Peter concluded: “While the clearing landscape is highly sophisticated, it is becoming harder and harder for hedge funds to gain real insight into the drivers of margin beyond what is reported by their brokers. At a time when investors are scrutinising every penny, the last thing any fund manager needs is to be restricted by unnecessarily posting more margin than they have to. Some are already finding ways around this issue, which is why we are seeing more firms turn towards in-depth analysis in order to seek out opportunities to reduce margin.”