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Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization
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Options for Cash Optimization Expand
Having internal repo capabilities provides asset
owners opportunities to extend their cash pool to
invest in other opportunities or ensure better liquidity.
This is especially true for large institutions that have
long investment horizons and can consider term repo.
Survey participants noted that they are increasingly
looking at illiquid investment opportunities for their
cash such as airplane leases or mortgage holdings
in distressed assets. These opportunities can often
provide good yields for the organization, but ups their
need to better manage their supplies of lendable
bonds to ensure short-term liquidity. Having the
ability to repo out their lendable bond assets provides
them the flexibility to meet these dual challenges and
allows the repo teams to work closely with Treasury to
ensure a streamlined operation.
Reverse repo is also becoming an increasingly
important cash management tool for asset owners.
In the U.S., the Federal Reserve in September 2013
launched an experimental Overnight Reverse Repo
Facility that allows an expanded set of counterparties
to directly access the New York Federal Reserve’s
funding window. In an unprecedented move, the Fed
gave cash reinvestment funds run by 23 separate
asset managers direct access to this program.
While the purpose of this facility is to provide the Fed
an outlet to help manage monetary policy as they
transition away from Quantitative Easing, the impact
of the program has been to place a floor on repo
lending rates; to at least partially disintermediate
the large banking organizations in cases where
former clients can now directly access the facility; to
solidify the incentives for large asset managers with
registered funds that meet the minimum criteria to
be an eligible counterparty to perform their own repo
and reverse repo trading; and to create competition
for other asset owners that do not have eligible
funds, but are still looking to lend their treasuries and
government securities supply out to the market. The
impact of this reverse repo program is illustrated in
Chart 24.
“ The Fed may use their reverse repo facility as a floor for their
monetary policy on short-term rates. This opens up a whole new
competitor in the market. With the new program, the Fed would
lend their securities to the street and the level at which they are
willing to do it will become the floor for the market. This puts the
Fed in a competitive position with us because that’s what we do,”
— Asset Owner—Institution
0
0.05
0.1
0.15
0.2
0.25
0.3
0
50
100
150
200
250
24-Mar-14
10-Mar-14
24-Feb-14
10-Feb-14
27-Jan-14
13-Jan-14
30-Dec-13
16-Dec-13
2-Dec-13
18-Nov-13
4-Nov-13
21-Oct-13
7-Oct-13
23-Sep-13
Source: Federal Reserve
Chart 24: Impact of Federal Reserve Board Reverse Repo Program
Participation Amt (Billions)
GCF TSY Rate
Fed Rate