Hedge Funds asked to play the role of "fish in a barrel" Tuesday, February 26, 2008
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.
Duh!
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
- to encourage competitive pricing between brokers and allow comparisons on service and price to be made
- to benefit from specialisms individual brokers can offer in particular products or stocks
- to avoid a broker being able to "take advantage" of knowing the positions and strategies of a fund via the prices quoted for assets and stock lending. Regardless of what "chinese walls" brokers claim to operate, all hedge funds are concerns about chinks in such walls
- concerns by a hedge fund about their counterparty exposure and concentration risk in using a single firm. For instance, when Refco went bust, a number of its clients found themselves unable to trade elsewhere for a short time until positions were released by the liquidators.
To advocate the funds should relinquish these benefits smacks of unfairly favouring one constituency over another to make a regulators life easier.
Labels: Hedge Funds
posted by John Wilson @ 3:02 PM Permanent Link
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