Speaking to InvestorDaily, Mr McNicholas said firms like State Street indirectly finance the securities lending activity of hedge funds via the prime brokerage market.
“We know that Basel III is likely to have an impact on the way we structure our businesses and the way we interact with our clients directly – as well as our prime brokerage clients,” he said.
While some hedge fund strategies will benefit from the post-Basel III environment, others will find it more difficult to finance themselves, Mr McNicholas said.
“Credit-focused strategies and fixed income strategies have been a lot less attractive to the prime brokerage community in the last number of years,” he said.
Without the higher volume of trading required for a higher return on equity for prime brokerages it becomes harder for the likes of State Street to support such strategies, Mr McNicholas said.
“On the other hand, certain equity long/short strategies continue to be attractive,” he said.
Because equity long/short strategies use listed derivatives and don’t require a lot of leverage they continue to be more easily financed, Mr McNicholas said.
The comments come off the back of a recent State Street-commissioned survey of 235 hedge fund executives titled The Alpha Game.
The report found 29 per cent of hedge fund managers thought Basel III would significantly increase the cost of their firm’s financing.
An additional 29 per cent ‘didn’t know’ what the impact would be, while the remaining 42 per cent disagreed there would be an impact on financing as a result of Basel III.
Thirteen per cent of respondents said the Basel III changes would significantly change their firm’s business model, and 37 per cent said they would significantly change the way the firm manages its service providers.
“The most forward-looking funds will start to look at these questions now to prepare for potential impacts,” said the report.
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