New bank regulations and the subsequent increase in trading fees have pushed hedge funds further towards non-traditional financing sources, says Ernst & Young (EY).
The 2015 Global Hedge Fund and Investor Survey released by EY revealed that hedge fund managers are increasingly exploring alternative and non-traditional sources of financing.
According to the report, 29 per cent of hedge funds surveyed experienced prime broker price increases in the past year, with 22 per cent expecting further increases.
As a result, 13 per cent of hedge funds intend to seek financing from non-traditional sources in the next two years. The alternative sources being considered are institutional investors, sovereign wealth funds, custodians and other hedge funds, the report said.
EY Oceania wealth and asset management leader Antoinette Elias said: “All forms of financing are becoming more expensive for the majority of managers, and this has a direct effect on overall trade economics.”
The report said new regulations, like Basel III and Dodd-Frank, have changed the business dynamic between hedge fund managers and prime brokers, with many of the latter now reluctant to hold cash for the funds.
Subsequently, 53 per cent of hedge fund managers have moved cash to custodians, while 35 per cent have purchased highly liquid securities as cash alternatives.
EY Oceania hedge fund leader Jon Pye said: “Many prime brokers have less capacity to offer than in the past, so hedge fund managers are increasing the number of relationships they have to reduce counterparty capacity risk.
“As a result of these shifting industry dynamics, we are seeing an increasing need for hedge funds to dedicate individuals to manage their counterparty risk, collateral and treasury,” Mr Pye said.
In addition, the report noted that asset growth remains the top strategic priority for hedge funds, with 57 per cent marking this as a foremost priority.
EY said new growth methods identified by the respondents include adding new hedge fund strategies, identifying new investor bases and increasing penetration with existing investors.
“As the hedge fund business has evolved, increased competition, as well as heightened demands from investors and regulators alike, has compressed margins via the two-fold squeeze of lower top-line revenues and larger expenses,” Mr Pye said.
"Growing assets to critical mass within a shorter timeline is critical for managers looking to run profitable organisations."