Hedge fund treasury teams are starting to generate significant alpha and efficiencies for themselves and their prime brokers.

Faced with tougher regulation and added financing complexity, many hedge funds have sought to build first class treasury units in recent years by adding staff, boosting automation and taking on additional responsibilities.

This week analysts at Barclays Prime Services suggested the changes are starting to pay off.

“We believe that the hedge fund industry has passed a tipping point,” said Louis Molinari, the firm’s global head of capital solutions.

“There is a structural shift from the treasury group serving as a utility to it transitioning to a unit that can generate alpha through efficiency and optimisation.”

Molinari's team quizzed a group of hedge funds with a combined $400bn of assets as part of a recent study, roughly 15% of the industry.

80% have a distinct treasury function separate from operations, dedicated to portfolio financing, cash/collateral management and counterparty management.

"In the hope of becoming better partners with their prime brokers (aligning on return on assets (ROA) metrics, improving efficiency of long and short positions, and reducing balance sheet consumption), hedge funds are trending toward a centralised approach, which allows them to be more efficient and optimised with their various counterparties," Molinari added.

Financing

The vast majority have centralised their financing process, where their treasury team, as opposed to individual traders, are responsible for such items as locating borrows and negotiating rates/prices.

Most indicated that they fully intend to continue increasing the level of automation at their firms, with investments in both internal and external technology solutions.

“A clear benefit to the investment in this area appears to be the impact from proactive management of stock lending rates,” Molinari said. 

“This can provide substantial savings for hedge funds via better pricing of and tighter ranges for their hard to borrow positions.”

Counterparty management

Meanwhile, more than half of the $5bn+ managers polled by Barclays now use formal and transparent broker reviews as tools to decide how to allocate prime broker balances.

The key factors mentioned influencing wallet allocations were trade level factors - e.g., shorts /hard to borrow supply, execution, rates.

“Much like the trend with dedicated treasury headcount, smaller and/or single strategy hedge funds require fewer PB relationships as they either have simpler needs or less financing wallet to spread around.”

Priorities 

Going forward, the hedge funds Barclays Prime Services spoke to indicated their treasury functions are still in build-out mode.

The three main areas they are focusing on going forward are their level of automation, sourcing technology solutions, and counterparty management.