By Hedge Fund Insight staff
Unintended consequences of convoluted regulations are hindering hedge fund managers from boosting returns for their investors.
According to findings from analytics firm OpenGamma, hedge funds can now be charged an eye watering 70% additional margin because of regulatory changes, destroying returns as a result. A staggering cost to absorb, particularly for global macro hedge funds who only returned 2.3% in the last year (source: HFR).
New rules, such as those forced upon clearing houses by the Committee on Payments and Market Infrastructure (CPMI) and the International Organisation of Securities Commissions (IOSCO), mean fund managers have no choice but to rethink their strategies. Requirements, such as those which make the likes of Eurex, CME and ICE charge additional margin for large positions (so called liquidity or concentration add-ons) eat into fund manager’s returns.
Commenting on the findings, Peter Rippon, CEO of OpenGamma said: “Making fund managers post more cash to guard against another financial meltdown is all very well in principle. But in practice, these rules trigger an enormous cost for the industry, which ultimately, will be shouldered by the very end investors rule makers are trying to protect.”
Hedge funds most affected by new margin rules are those looking to exploit price differences between two related markets, like bonds vs futures. A firm like this may have to post significantly more margin for a very large position. On the flipside, the research showed that those who carefully manage margin can control increases. The challenge is that understanding the specific nuances of new margin models requires significant investment at a cost-conscious time for fund managers.
Rippon concluded: “The bigger the hedge fund, the bigger the problem. The trouble is that it is becoming harder to gain real insight into the drivers of margin beyond what is reported by their clearing brokers. At a time when investors are scrutinising every penny, the last thing any portfolio manager needs is to be hamstrung by unnecessarily posting more margin than they have to. Some are already finding ways around this issue, which is why we are seeing more firms turn towards in-depth analysis in order to seek out opportunities to reduce margin.”
OpenGamma is the analytics company dedicated to improving returns for derivatives users through capital efficiency. Regulation continues to increase the cost and capital required to trade derivatives, meaning that users now need to understand a complex web of models in order to trade effectively. Since its founding in 2009, OpenGamma has provided unparalleled derivatives model expertise, building a client base of the world’s leading financial institutions across clearing houses, banks and buy-side firms. Simple set-up means clients are up and running within hours, receiving actionable recommendations for immediate savings. With thousands of users depending on the derivatives analytics everyday, OpenGamma helps firms tackle the biggest issues in derivatives trading.