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Basel III to 'indirectly impact' hedge funds
17 February 2014
Managers must be aware of how the new capital rules will shape the hedge fund/prime broker relationship, says JPMorgan
The impact of the Basel III leverage ratio will be felt far
beyond the banking community, according to a new report by
JPMorgan on the future relationship between prime brokers and
their hedge fund clients.
The report said that the bank capital rules will indirectly
affect hedge fund managers as buyers of banking services. Basel
III will undoubtedly change the way that prime brokerage desks
operate and trade as a result of increased bank capitalisation,
reduced liquidity risk and constrained bank leverage.
"Hedge funds need to consider these critical drivers of change
affecting their prime brokers in order to better understand how
to adapt to the evolving business environment."
Hedge funds have historically relied on their prime brokers to
help finance their portfolios. Structural challenges to the
prime brokerage financing model are also structural challenges
to the hedge fund financing model, said JPMorgan.
The bank warned hedge fund managers to expect banks to become
more "discerning" in allocating equity to new and existing
"Clients who may be particularly at risk are those whose
strategies are significant consumers of balance sheet such as
highly levered, directional portfolios with little or no
The report advised managers to consider the value of a fund's
portfolio to the prime broker, understand the total value of
the fund's business and evaluate the impact of new regulation
on the broker's model.