Basel III reforms have fundamentally changed how asset managers are connected to the financial system, with financing costs increasing and the prime brokerage business evolving, according to a joint survey by the Alternative Investment Management Association (AIMA), the lobby group for alternative asset managers, and S3 Partners, a financial data and analytics firm,
The survey of 78 alternative asset managers with combined assets under management (AUM) of more than US$400 billion found that financing costs have risen for half of firms, and that 75% of firms expect further cost increases over the next two years.
The survey also found that 75% of firms say they have been asked to change how they do business with their prime brokers, with two thirds of firms cutting the amount of cash they keep on their brokers’ balance sheets. In addition, most alternative asset managers have either maintained, or increased, the number of prime brokers they use over the last two years.
In a statement announcing the survey results, AIMA and S3 recommend that hedge fund managers take action to better deal with the changing nature of prime brokerage relationships by: improving the data they utilize; using different analytic tools; and ensuring they are on the same page with their financing counterparties.
“New bank capital regulations are creating downstream financing challenges and opportunities for asset managers and hedge funds. The survey clearly shows how plugging into the financial power grid is getting more expensive,” says Bob Sloan, CEO of S3 Partners.
“As the survey results show, access to unbiased data, comprehensive return on assets/return on equity analytics, and a common language are critically important towards determining fairness — as rates, margin, spreads and contracts will be a key determinant for an asset managers’ success,” Sloan adds.