Nearly half of those surveyed said they were now using benchmarks to gauge the returns on the cash balances in their portfolios – twice as many as reported this in the same survey in 2001. The result, says Bob von Halle, senior vice-president and director of business development at Horizon, is that an increasing number of funds are looking for an alternative to management of their cash by a prime broker. According to the survey, the number of managers holding cash with a prime broker has decreased from 65% to 59% since 2001.
Cash holdings by the hedge funds surveyed equate to about 15% of all assets under management. “Not an insignificant amount,” points out von Halle. “Managers using leverage products such as futures, options or commodities need only put down a small amount of cash on margin, and so can be left with a large amount of cash on the balance sheet. Many funds also hold cash as a buffer – in case of a margin call, or to invest in a new opportunity if the market changes.”
Typically, managers, particularly in the US, have tended to leave the cash to be invested by their prime brokers, either in money market funds or three-month treasury bills. Where T-bills are used, managers tend to get between 90% and 95% of the current market rate from their prime brokers. Money market funds are closer to the market rate, but often come at a higher cost.
A difference
Von Halle says that managers are now looking for alternative means of earning more on their cash balances. “When short-term cash rates in the US were about 1%, and hedge fund strategies were producing double-digit returns, managers didn’t care about maximizing their use of cash, as it added very little. However, with returns decreasing to mid to high single digits, and short-term cash rates now at 5%, attention to cash management can really make a difference. A professional cash manager can make you 35bp to 50bp more than your prime broker. That can be the difference between producing a negative return or a flat return, or a flat return and a positive return.”
Horizon Cash Management designs a portfolio of securities tailored to clients for their liquidity needs. “Depending on their overnight liquidity needs, we can build a portfolio of securities to match their needs and offer them higher cash yields,” says von Halle. In addition, Horizon manages the cash transfers to and from clients, as well as to and from the clearing firms and prime brokers if there is a margin call.
“Half of our clients are outside the US, and we’re seeing interest from them, and from all sizes of funds,” says von Halle. “It’s part of the general trend to maximize efficiency through outsourcing, and part of the trend towards finding alternative means of developing permanent capital, such as looking to IPOs or tapping unsecured debt markets. Hedge funds are becoming more like traditional asset managers, and that can mean using prime brokers less.”
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For now prime brokers are still hedge funds’ main cash manager |
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Methods used to manage cash balances by hedge funds |
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Source: Horizon Cash Management 2006 survey |
