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Hedge funds ’ 2020 rebound paves upward trend for securities lending desks
The resurgence in short selling and increased performance among hedge funds could pave the way for a profitable year for securities lending desks of banks .
rebound in hedge fund performance
A and allocations is expected to provide a major boost for the securities lending business of custodians and prime brokers in 2021 . Total global hedge fund assets under management ( AUM ) ballooned to a record $ 3.6 trillion at the end of last year , as investors added around $ 16 billion to hedge fund strategies during the second half of the year , according to data published by Hedge Fund Research .
According to industry analysis , hedge funds have largely bounced back from the COVID-19 crisis , which saw many of the largest funds deleverage and shrink their portfolios as a result of the market volatility . However , improved performance among hedge funds , coupled with the rollback of short selling bans across Europe and Asia is also refuelling demand for leverage and financing , often provided by prime brokers and their securities lending desks . “ We saw the deleveraging that occurred [ in the first half of 2020 ] and the demands that were associated with that deleveraging decline . That didn ’ t return until the latter part of the fourth quarter where we saw significant increases in financing demands ,” said Bill Kelly , global head of agency lending , BNY Mellon at a recent online event . “ This was a result of industry high levels of cross-currency funding , the use of equities as collateral , and we saw greater breadth and depth in the demand for equities . That has been sustained through the first several weeks of January . If you marry that with the return of dividends , which didn ’ t occur in Q2 2020 and is now available to the marketplace in 2021 , this is as another greenshoot for the industry .” According to figures from DataLend – the market data division of EquiLend – the global securities finance industry generated $ 7.66 billion in revenue for lenders in 2020 , representing an 11.6 % decrease from the previous year as the fallout from the
COVID-19 pandemic hit the sector . However , confidence in the hedge fund industry and the expected resurgence of inflows could represent a meaningful increase in business for banks and their lending desks . “ Whilst there was some dispersion in the financial results of different investors , on the whole it was very positive , and it is giving us optimism to inflows for 2021 with allocators sticking with or allocating to hedge funds . Translate that into our world , and the financing businesses are the beneficiaries of some of that growth ,” said Matthew Collins , co-head of securities lending for the Americas , Morgan Stanley . In addition to hedge funds , a greater number of asset managers are expected to increase their securities lending activity in 2021 . A survey of 50 global asset managers , conducted by Brown Brothers Harriman ( BBH ) in December , found 40 % take part in securities lending and a further 26 % are expected to increase their engagement in the practice to improve performance . “ Data [ from the survey ] showed asset managers leaders are looking to grow their securities lending activities . However , it can be complex and expensive to run a lending desk , so there could be some asset managers reconsidering the use of third-party providers for their lending programmes ,” Thomas Poppey , global co-head of securities lending at BBH , told Global Custodian earlier this month .
14 Global Custodian Spring 2021