Regulations intended to bring systemic stability to markets are hitting returns from hedge funds in unintended ways as margin requirements are rising by up to 70%, according to analysis from OpenGamma.
The analytics firm says the rising margin costs are hitting hedge funds hard, particularly global macro strategies, which on average returned just 2.3% over the past year, it said citing HFR data.
The rules leading to this change in the market include the requirements on clearing houses from the Committee on Payments and Market Infrastructure (CPMI) and the International Organziation of Securities Commissions (IOSCO) – this is hitting Eurex, CME, ICE, which are charging additional margin for large position, the so called liquidity or concentration add-on, explains OpenGamma.
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.”
The types of hedge funds most affected by the new margin rules include those looking to exploit price differences between two related markets, such as bonds versus futures, notes OpenGamma. In such instances, the funds will have to post “significantly more margin for a very large position”. The demands of the new regulations can be managed, to reduce the risk of being hit by higher margin costs, but this takes time, and size really does matter, Rippon added.
“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.”