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Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization
Being able to reverse repo out of cash to increase
an organization’s supply of government securities
also creates more options for these organizations to
manage their collateral, although the Federal Reserve
has placed a cap on the amount of reverse repo for
individual asset owners. In Europe there are often
large pools of cash that are not being utilized because
cash is not accepted as collateral against securities
positions lent by UCITS funds and because there
are not as many cash investment vehicles as in the
U.S. Reverse repo gives these organizations options
to exchange unutilized cash in trading portfolios for
government securities.
Asset owners can either realize marginal yields by
holding these government securities or create a dual-
use for this supply by then posting the government
securities as collateral for derivative positions. As
we will discuss in a coming section, new derivatives
regulations are likely to substantially up demand for
this supply in coming years.
Some market leaders have even gone one step
beyond these goals. Armed with a variety of tools
to effectively manage their cash, they are creating
robust models of all uses and sources of cash in their
organization in order to create the most efficient use
of this supply.
“ We put a one-pager out on all sources and uses of
our cash. I don’t think anyone on the pension side
has ever done that. We look at every fund that
has the potential to tap into cash. Every group
here and we figure out when they would need
it. We look at the hedge fund investments, the
private equity investments; real estate that has
guaranteed loans that could be hit and become
on balance sheet. Then we figure out what do
we have to pay out. This would be our pension
benefits and salaries. We put this report out
once/month. We factor all of those inputs into our
cash need and we then identify where our cash
reserves are. Unless you have that snapshot, you
don’t know how much cash you need to carry,”
— Asset Owner—Institution
“ We are doing some transactions which actually
lock up capital, such as airplane leases, mortgages
in Europe. Really anything that doesn’t fit into a
box. We find that it’s more prudent to lock up
capital and get the returns we need, but also
need to be in tune with liquidity requirements,”
— Asset Owner—Institution