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Brokers raising hedge fund lending, eye profits: experts |
LONDON: Brokers looking to grab lucrative market share are offering to lend more to hedge funds, despite falling fund returns and warnings from regulators of risks posed by the sector, brokers and funds said.
With the stratospheric growth of hedge funds in recent years, banks are pouring money and resources into so-called “prime brokerage” businesses, which provide trade execution, stock lending, leveraged finance and other essential services.
Banks are looking to gain a larger share serving an industry that has grown to exceed $1tn in assets and that some say could double in a decade.
One front in the competition is the level of leverage finance banks are offering, despite falling hedge fund returns this year.
“Banks have recently pitched to me ... to pay (lend) 90% on transactions,” said one hedge fund source specialising in buying the debt of troubled companies.
Such leverage, which multiplies a hedge fund’s financial firepower by a factor of 10, compares with a level of three or four times last year, he added.
One broker confirmed on Friday that such leverage was available on diversified pools of assets, if hedging had been used to enhance the credit quality or significantly reduce market risk.
“Ten times leverage on a diverse portfolio, hedged to a triple-A credit profile, is aggressive, but from a lender’s point of view, still within bounds,” the broker said.
“Overall, brokers are more aggressively courting hedge funds - not just in leverage terms, but also in pricing and access to services,” he added.
The chief executive of the UK’s Financial Services Authority, John Tiner, sounded a warning to investment banks this week about their reliance on hedge funds as a bulwark of profits.
Hedge fund returns to date in 2005 have averaged around 3%; for 2005 overall, analysts expect returns of 5 to 7%, compared to around 9.5% in 2004, and more than 15% in 2003.
Hedge funds do not necessarily take the leverage on offer, because a failed investment hits them harder than a lender which may only lose out if a borrower were bankrupted.
“For the most part, hedge funds are not using that (ten times) leverage... But the risk remains that a poorly managed fund could avail itself of too much leverage and incur significant losses,” the broker said.
Hedge funds said the market was overheating as money piled into European capital markets, following new fund-raisings and the arrival in London this year of more US hedge funds.
“In current markets, competition is very tough and (funds are) ready to stretch rules too often,” said a second hedge fund manager, adding that he rarely applied any leverage on investments. - Reuters |
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