Hedge Funds asked to play the role of "fish in a barrel"

In a report this week, the US Government Accountability Office has concluded that the use of multiple prime brokers by a hedge fund could pose risks to the economy since no single broker had a complete view of a fund and its' leverage. According to the report, hedge funds "often declined to share information about specific positions" with brokers.


I can certainly understand why the regulators might prefer the simplicity of hedge funds using a single broker. It would indeed allow a broker to better understand what the fund was up to and give the regulator a single broker to blame if things went awry. However, there are many reasons why a hedge fund chooses to use several brokers including
Spreading business between firms is usually more costly to a hedge fund in terms of reduced collateral netting opportunities and higher commission rates, but the merits are evidently considered to outweigh the demerits. Moreover, I can think of few, if any, firms who can claim to have a complete view of their counterparties especially brokers that trade with each other.

To advocate the funds should relinquish these benefits smacks of unfairly favouring one constituency over another to make a regulators life easier.


posted by John Wilson @ 3:02 PM Permanent Link newsvine reddit


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