Hedge fund assets that are available for prime custody services stood at $684 billion in August 2012, increasing by 40 percent since 2010, according to a new report.
The report from financial research and consulting firm Finadium—in conjunction with BNY Mellon—found that approximately half of all hedge funds with more than $1 billion in AUM have a prime custody agreement in place.
This is up from 15 percent in 2008, as funds increasingly seek to mitigate counterparty risk.
Prime custody refers to the servicing of unencumbered assets within alternative investment portfolios and is performed by prime brokers and custodians to provide greater transparency and risk mitigation.
But prime custody’s definition has changed, and largely depends on the custodian servicing hedge fund assets.
In its report, Finadium said: “Most custodians now have dedicated service teams focused on their hedge fund clients. This is the new prime custody, with sales and service efforts that seek to recognise hedge funds as a distinct client base with a different set of needs than a pension plan or mutual fund.”
The 40 percent increase in assets that could be a part of a prime custody service represents the assets of hedge funds—not including funds of hedge funds—“multiplied by an estimate of 38 percent of excess cash and securities in an average hedge fund’s portfolio”
Assets that are available to prime custody services have “risen steadily over the years and are expected to grow further”, according to Finadium.
The upsurge of hedge funds assets is the result of increasing hedge fund assets under management (AUM) and lower levels of borrowing from prime brokers.
Finadium said: “More than ever, hedge funds are establishing triparty relationships with both their prime custodian and prime brokers. While initially this may force some price renegotiation on the use of leverage?and trading commissions, overall hedge funds reported financially that maintaining a proportion of assets in prime custody is much more beneficial than leaving all the assets with a prime broker.”
In a statement, Marina Lewin, managing director in BNY Mellon’s alternative investment services business, said: "Hedge funds are putting far more emphasis on how they manage custody of their assets and increasingly looking to adopt best practices to ensure their counterparty risk profiles are optimised and meet investor requirements.”
"BNY Mellon works in partnership with its extensive network of prime brokers, so clients maintain their current prime broker relationship but have the added benefit of holding their assets with an independent third-party custodian.”
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