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Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization
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57
Only Limited Number of Money Managers
Likely to Pursue this Model
The ability to make such sweeping change inside
an existing firm can be quite difficult. Several
survey participants noted that they had begun their
programs years earlier and others noted that they
had to slowly leg into their offering in increments
given the complexity of the challenge. In these firms,
portions of the liquidity management unit are in
place, but other teams have yet to migrate as systems
are upgraded and skills hired into the organization.
Covering the costs of such transformation is going
to be much more easily absorbed in large asset
management firms that can offer these services out
across an extensive product catalog. Smaller firms
are going to be hard pressed to afford the operational
disruptions and financial hit involved in moving to the
new model.
The trade-offs of building this capability in house may
also be a deterrent. Several interviewees expressed
concern that by internalizing their lending function,
they would be degrading the flow of information they
got into their organization and hurting the neutrality
that allowed them to be internal advisors to their own
portfolio managers about what supplies should or
should not be put out on loan.
As such, the number of firms that choose to go down
this route may be limited. Many organizations are
likely to prefer working with their lending partners
and leveraging their expanded ability to offer multiple
routes to market for their supply. This will be nearly
universally true of institutional asset owners that lack
internal money management capabilities.
In such instances, these firms are most likely to focus
on lenders that can also offer collateral management
options alongside their set of lending and custody
services as discussed in Section XVIII.
“ Most people say, ‘We can do this and optimize
collateral,’ but this may actually be too hard for
many to do well so they will outsource it to a bank,”
— Asset Owner—Money Manager
“ We made a decision not to start our own
securities lending desk. For the $4-$5 million
that I pay our custodians, I could set up quite a
nice desk here, but the minute I have my own
book, I become a counterparty to the fund
managers and not a strategic advisor to them,”
— Asset Owner—Institution
“ I think the question as to whether the securities
lending business should be done by the
custodian or internally depends on a firm’s
size. We are large enough that we can do
something interesting with the assets ourselves,”
— Asset Owner—Money Manager