JERSEY CITY, N.J., June 25 /PRNewswire-FirstCall/ -- Pershing LLC, a BNY Mellon company, announced today the availability of a new independent study, Lending and Leverage: The New Securities Finance Model for Hedge Funds, which examines the changing business model of securities financing for hedge funds in 2010 and beyond.
Hedge funds are currently being offered new avenues to satisfy their financing needs, driven in part by a divergence in business models between large and small prime brokers. Lending and Leverage: The New Securities Finance Model for Hedge Funds, which was developed with Finadium LLC, draws on proprietary investor surveys, as well as primary and secondary research, to provide insights into changing investor attitudes and an evolving regulatory environment. It also offers guidance on how hedge funds can execute successful lending programs for the future. Highlights from the study include:
- Hedge funds face a mixed climate. Institutional investors are reasonably comfortable with leveraged investing today, though investor opinion about hedge funds and leveraged investing remains mixed. In a recent Finadium study of 92 U.S. public pension plans, including 25 focused interviews, 56% of pension funds reported having at least some investments in hedge funds or 130/30 vehicles. This does not represent, however, a wholehearted acceptance of leveraged investing. Many pension fund managers cited their personal dislike of leveraged investing, even though their institutions were invested in hedge funds.
- Investor and regulatory changes forced the evolution. The market turmoil of 2008 served as a catalyst for changes to the prime brokerage industry, and the decision by many global regulators to suspend short selling in 2008 created major disruptions in the prime brokerage business model. This resulted in the curtailing of client short selling in less liquid issues—the most profitable segment of the business for both hedge funds and prime brokers. As the ruling to avoid naked short sales has been made permanent, hedge funds and prime brokers have made the appropriate adjustments in their practices, and they are aware of greater possible changes in market structure.
- Securities lending remains the key differentiator. While the number of prime brokers has increased, access to securities lending inventory through retail and institutional programs remains a key differentiator for hedge funds in the current competitive marketplace. Securities loans may not be as important to hedge funds today as they were in 2008, however, it is expected that securities lending will return to center stage over the next several years.
- Investors are demanding greater transparency. Leveraged investing continues to be seen as a murky area full of risk and unintended consequences. Transparency in securities lending pricing creates a more productive relationship between hedge funds and their prime brokers, and it offers hedge funds new opportunities to attract investors.
- Prime brokers remain critical service providers for hedge funds. A hedge fund's best ally in obtaining fairly priced securities loans or synthetics will be its prime broker. The critical point in choosing a prime broker is ensuring that the fund's and prime broker's interests are aligned; if one party looks for transparency while the other does not, regular conflicts will arise. If both parties look to capitalize on the best-priced, most accessible means of completing a trade, then both parties will benefit by creating a lasting relationship.
"The major challenge for hedge funds of all sizes continues to be access to hard-to-borrow securities. A prime broker with access to inventory, whether through electronic markets, retail pools or relationships with institutional lenders, is critical," said Craig Messinger, managing director of Pershing Prime Services. "Forging a strong operational relationship with a prime broker is critical to a hedge fund's success, regardless of where securities loans are sourced."
Josh Galper, managing partner of Finadium stated, "Going forward, hedge funds will need to spend more time focusing on the costs and means by which they obtain securities loans. As more transparency enters the securities lending market, investors are looking for hedge funds to demonstrate an ability to secure the best financing for their trades. This in turn places a greater emphasis on how funds source securities lending inventory and how they manage their prime brokerage relationships."
Pershing Prime Services delivers an unconflicted, comprehensive suite of global prime brokerage solutions, including extensive access to securities lending, dedicated client service, robust technology and reporting tools, worldwide execution and order management capabilities, a broad array of cash management products and the integrated platform of BNY Mellon. Pershing Prime Services is a service of Pershing LLC. A copy of Pershing's new independent study and additional information about Pershing Prime Services' capabilities and solutions are available at www.pershingprimeservices.com.
Pershing LLC (member FINRA/NYSE/SIPC) is a leading global provider of financial business solutions to more than 1,150 institutional and retail financial organizations and independent registered investment advisors who collectively represent approximately five million active investors. Located in 20 offices worldwide, Pershing and its affiliates are committed to delivering dependable operational support, robust trading services, flexible technology, an expansive array of investment solutions, practice management support and service excellence. Pershing is a member of every major U.S. securities exchange and its international affiliates are members of the Deutsche Borse, the Irish Stock Exchange and the London Stock Exchange. Pershing LLC is a BNY Mellon company. Additional information is available at www.pershing.com.
BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation. BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 34 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, providing superior asset management and wealth management, asset servicing, issuer services, clearing services and treasury services through a worldwide client-focused team. It has $22.4 trillion in assets under custody and administration, $1.1 trillion in assets under management, services $11.8 trillion in outstanding debt and processes global payments averaging $1.5 trillion per day. Additional information is available at www.bnymellon.com.
SOURCE Pershing LLC; BNY Mellon