Basic HTML Version
48
|
Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization
direct with a non-traditional counterparty like a
hedge fund or sovereign wealth fund and receive
in HQLA for that position to help the client with
their own collateral needs. In this type of asset
transformation, the solutions team can facilitate
the arrangement and execution of the transaction,
bridging their agent and principal contacts on
either side of the trade. Similarly, the lender
could help the client use their own HQLA or GC to
obtain a less liquid asset that may fit well in their
portfolio. Finally, the solutions team could help
the asset owner transform their cash holdings by
offering up non-traditional financing opportunities
for long-term cash investments such as REITs,
commodities or loan books.
Finally, the solutions team could help the client
utilize a portion of their supply as part of a synthetic
loan. In these instances, the client sells their asset
versus a derivative transaction. There are many
options on why a client may look toward this type
of exposure. They could already be long exposure
to a certain security and they wish to extend that
exposure via use of a derivative position. They
could be long and want to neutralize that long
exposure for a period by offering up that long
asset as part of a swap transaction for a specified
term. They could also look to sell a long position to
the bank and get short, covering that transaction
with a swap. This is especially important in Europe
where outright shorting of UCITS is not allowed.
In instances where the solutions team uses the client’s
asset to make money via a loan, a transformation or
a synthetic position, a further re-use leg is enabled.
In each of these instances, the client is going to
receive in collateral on the position—either cash or a
new asset.
The solutions team can again coordinate with the
client and offer up additional choices to hold the
new asset in custody, use it to internalize against a
short obligation, cover a delivery fail or post it as
collateral (if allowed). For cash received as custody,
the solutions team can facilitate a reverse repo of the
cash for the client and again bring in a new asset for
these same purposes or they can choose to reinvest
the cash to earn an incremental return.
New Model Puts Focus on Importance of
Advisory Services & Interoperability
Having the right organizational structure that
encourages and rewards cross-selling is one key
to successfully moving toward asset and collateral
optimization, but there are other challenges as well.
A very deep skill set is required from those looking
to work with clients across this entire set of options
and organizations are investing in senior advisory
personnel to lead these efforts.
These individuals will work with the sales coverage and
the product experts internally to source opportunities;
they will work to educate and collaborate with asset
owners to optimally direct their use of supply and
they will act as a liaison between the client and the
internal team, helping them maneuver across the
multiple parts of the organization involved in this
complex landscape.
These teams have the ability to look holistically across
the potential uses of supply, model the potential
returns or savings along each path and create a
hierarchy of how to best direct supply through
discussions with the asset owners. For now, much of
this modeling and instructing is done manually with
the advisors working across the required internal
teams to facilitate information and service flow.
“ Some firms are looking at equity vs. equity lending,”
— Agent Lender
“ We’ve been big fans of using repo. We like it because
it offers flexibility and the ability to customize the
type of collateral,” — Agent Lender
“ We are a powerful counterparty for the banks
because we can talk multi-asset. They really
appreciate the range of business this allows,”
— Asset Owner—Money Manager
“ We are getting asked more and more to finance things we’ve
never financed before—things like loan books and commodities.
I am not sure you can indemnify these assets, but these are
situations where we can use our relationship with our clients
and convince them to let us use their cash to finance
non-traditional stuff,” — Agent Lender
“ There are clients who want asset transformation who have
difficult portfolios. So instead of earning on lending of their
assets, they will have to pay for transformation of those assets.
You just look to put the lender and borrower together. Either
way you look at it, it is still an agency relationship. When we do
things on term, we can charge for arranging,” — Agent Lender