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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 business.

"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 internalisation value."

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.


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