Decomposing FoHF returns
Where and when funds of hedge funds add and lose value
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12/05/2010
Editor's view: 13 May
The Eurozone bail-out has staved off the worst of the region’s debt contagion, while testing the mettle and policy response of the region’s EU-member states. Simultaneously, widening CDS spreads and the vulnerability of European banks has also set a trial for the industry. Creating enough potential counterparty concerns to stress-test the post-Lehman multi-prime model.
As this week’s news feature makes clear, the industry has passed the exam with flying colours. In the not-too-distant past, funds could be found paying lip service to multi-prime, without much genuine action. This ‘all-talk’ phenomenon was quickly exposed by the holing of Lehman and the spectre of rehypothecation. Not only were significant assets lost, but existing prime brokerage relationships shifted overnight.
The impact was transformative. While client balances at investment banks – Goldman and Morgan in particular – dropped, the European universal banks were immediate beneficiaries, turning panicked enquiries into customers within 24-hour periods. In a very short time, the illusion of multi-prime had been made flesh.
This time, some of those who did so well from the Lehman-fallout were the ones left exposed. UBS, Deutsche and Credit Suisse were all involved in faulty European sovereign debt. However, the free-flowing manager traffic at PBs, which has now become the norm, was neither halted or redirected during the who affair.
The lack of operational panic at hedge funds has been comforting. Client balances at all the PBs have, anecdotally, remained static as the majority of hedge funds believe they have their counterparty risk well covered. While long assets, presumably the lion’s share of most funds, are wrapped up tight in unsinkable custody accounts.
Europe has come in for a fair deal of flak recently, much of it – particularly in the ongoing AIFM debacle – deserved. Yet the weekend’s €750m ‘Euro-Tarp’ proves that adversity has provided the bloc’s financial leaders with some genuine skills. Hedge funds have absorbed similar lessons, with multi-prime proving itself to be robust and, most importantly, real.
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