Jay Cyr: As a team lead of Treasury Coverage bankers covering the asset management sector, the survey was very topical for us. One of the things that jumped off the page to me was the amount of unencumbered cash that hedge funds keep. How does that vary across different hedge fund strategies?
Roark Stahler: So, we're including the portion of AUM that is not included as margin to get leverage or that's in, fully paid positions or non-finance positions, think, it's liquids or privates. But with that said, the credit was the lowest at about 25%. The equity/event and multi strats were in that 40 to 45% range. And then the macro was the highest at about 55% of their overall AUM.
JC: And what are they doing with that unencumbered cash? What sort of options do they have to invest it?
RS: Yeah. So, half of the managers decide not to take any risk. It's a fundamental choice that they'll put in money market funds. And that's kind of it. Just over 50% or so, will get between 15 and 20 basis points generally, which is, which can be a material amount. And they'll do that by, you know, investing in different treasuries, they'll do reverse repo, delta one trades. You know, they'll do index box options, etc.
JC: So based on your prior commentary, it seems as though a large portion of the unencumbered cash is earmarked for margin. What do those margin requirements look like? And how do they take shape across various hedge fund strategies?
RS: Yeah, I think the best way to answer that is relative to the GMV or the gross market value. So, if you think of credit, event and equity strategies would be somewhere around 20%, of their GMV, whereas macro, multi strats and quant can be around 5%. What this means is that hedge funds have buying power between 5 and 20 times the margin that they post. And that rate will depend on a variety of things including the liquidity. So, how liquid is the portfolio? More liquid, less margin. As well as the directionality. So, the more market neutral, again, the less margin that they would have to post. But let me ask you a question. So, you know, for the managers that don't have as much access to leverage, for instance, what solutions are you aware of?
JC: So increasingly, we've seen hedge funds access certain markets by partnering with a bank to provide a standby letter of credit or a bank guarantee, that helps them secure their exposure with counterparty. So, if we take a step back and think bigger picture, what are the sort of things that hedge fund treasurers are thinking about in the near term?
RS: Yeah. So, I'd say there are three main priorities. Number one is partnering with their brokers, to ensure that they are getting full access to the resources and they're using their financing wallet as often as that main currency to do so. The second would be that they're developing their technology tools, to do things like, optimise their pre- and post-trade allocations, for instance. And then finally, that they are optimising their portfolio across the entire fund, as opposed to doing it at a PM or business level, creating an omni-account, to ensure that they can get all of the efficiencies available, across their firms.
JC: this whole survey was really excellent content. I just want to thank you again for taking the time and sharing these insights with me.
RS: Thank you. And it was great getting to speak to some of our clients, on this topic. And I look forward to continuing the conversation.
JC: Excellent. Thanks.
