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Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization
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27
This contrasts to the spreads these same asset owners
in these regions are able obtain for their corporate
bonds and to the spreads being charged for emerging
market bonds as shown in Chart 22. Here, the average
spreads for the entire set of lendable corporate and
emerging market bonds are large enough that there
can be more flexibility in pursuing transactions.
These instruments represent that portion of the bond
market that is able to integrate most successfully into
an intrinsic lending approach.
In part, this trend has been fed by a rapid expansion in
the fixed income relative value hedge fund strategies
that are looking to go short some credit issues versus
long other issues. These strategies have experienced
“ Repo generates low revenue, but it ’s the
grease that makes other things happen,”
— Securities Lending Consultant
“ Repo and FX should go back to cash management
products. The tenor and impact of the product should
have much more influence. Anything under one
year should not be counted. It’s the cost of funding
that should be policed, not the tools of funding,”
— Asset Owner—Money Manager
Chart 21: Average Securities Lending Fee Comparison
Japan
Canada
USA
Western
Europe
0
30
50
60
70
80
90
100
Other Europe Includes: Nordic, Benelux, and Southern European Countries.
Source: Markit Q1 2014
Other
Europe
11.3
89.0
Basis Points
10
20
10.7
6.0
11.1
68
15.8
Average SL Equity Fees (bps)
Average SL Government Bond Fees (bps)
40
63.0
68.2
98.3
47.8
Chart 22 Average Securities Lending Fee
Comparison
*
: Corporate & Emerging Market Bonds
US Corporate
Bonds
Euro & Foreign
Corporates
Emerging Market
Bonds
0
45
25
15
35
5
*Fee is based on the weighted average cash spread and the non-cash premium.
Source: RMA Q4 2013
Basis Points
40
20
10
30
41.0
33.0
38.0