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Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization
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21
Other factors beyond the shift to intrinsic lending are
also contributing to this build up in unutilized supply.
§§
The institutionalization of the hedge fund industry
discussed in Part I of this year’s report has resulted
in managers trying to run their strategies with less
volatility and, thus, less leverage than in pre-Crisis
years. This is limiting demand from these sources
as discussed in Part 1 of this year’s report.
§§
Revised risk weightings under the Basel III rules
increase the balance sheet impact of short-
term loans, and the new supplemental leverage
ratio rules under Basel III are driving banks to
have to reserve increased amounts of balance
sheet capital to cover match book trades. Both
these factors are causing dealers to rethink their
desire to engage in transactions below certain
size thresholds as discussed in Part II of this
year’s report.
The issue with this continuing build in unutilized
lendable supplies is that the weight of this inventory
is causing overall returns in the industry to keep
eroding. Using RMA’s figures, we estimate that every
dollar held in a lending program earned only $0.08
in 2013—a record low. This compares to $0.10 at
the end of 2012 and figures as high as $0.17 back in
2007-2008.
Source: Markit
Trillions of Dollars
Chart 14: Un-Utilized Supplies of Lendable Assets
$12T
$13T
$11T
$10T
$12T
+82%
$14T
$9T
$13.9T
$7.6T
2007
2008
2009
2010
2011
2012
2013
Q1 2014
Q2 2014
$8T
$7T
Chart 13: Impacts of Market Shift Toward Intrinsic Lending
8%
10%
14%
20%
Utilization of Lendable Supply
19%
10%
18%
16%
12%
2007 2008 2009 2010 2011
2012
2013
Q1 2014
Q2 2014
$12T
$13T
$14T
$15T
Source: Markit
Value of Lendable Supply
$11T
$10T
$9T
$8T
2007 2008 2009 2010 2011
2012
2013
Q1 2014
Q2 2014
$15.5T
$14.9T