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Assets in hedge funds also plunged below $ 3 trillion for the first time since 2014 as investors withdrew net of $ 33 billion in the first quarter , the most in more than a decade according to Hedge Fund Research .
The turmoil resulted in a delicate dance between hedge funds and their prime brokers . As markets collapsed , it triggered margin calls to be collected by their banks . In a report conducted by Northern
Trust and treasury management technology vendor Hazeltree , margin calls among hedge funds jumped 86 % in March versus just two months prior in January .
Relationships had to be managed carefully with regular conversations around counterparty risk , credit risk , deleveraging , and financing , all in an environment where the entire financial services industry shifted to remote working . “ Communication between clients and prime brokers had increased because of concerns over understanding how liquidity and how financing would be maintained ,” says Mark Aldoroty , head of prime services , BNY Mellon ’ s Pershing .
So how have hedge funds come through the other side ? And what could the long-term impacts be with prime brokerage relationships ?
“ We saw significant deleveraging , especially from quant funds which shrunk their books quickly , whereas everyone else gradually deleveraged .”
DOUGAL BRECH , GLOBAL HEAD OF PRIME FINANCE , NOMURA
De-risk and de-lever As markets began to tank and margin calls skyrocketed , the first move among many in the hedge fund community was to de-risk and de-lever their long market exposure , in order to cover their short positions and repay money to lenders .
The crisis really hit hedge funds that adopt quantitative strategies hard , with one market commentator describing the situation as a new “ quant quake ”.
Data from Morgan Stanley ’ s prime brokerage division detailed the quant losses in March . For example , quant funds run by AQR , GAM Systematic , Renaissance Technologies , Two Sigma , and Bridgewater all experienced doubled digit drops in performance in March .
“ We saw significant deleveraging , especially from quant funds which shrunk their books quickly , whereas everyone else gradually deleveraged . The short selling bans across Europe and Asia also contributed to the book shrinking in size . As a result , the short book has taken a bit longer to bounce back as hedge funds were quick to take advantage of buying deeply discounted blue-chip names ,” says Dougal Brech , global head of prime finance , Nomura .
Those highly leveraged hedge funds that found themselves on the wrong side of the market downturn witnessed devastating effects to both their funds and the counterparties they were exposed to . This was showcased when ABN Amro said in March it would incur a $ 200 million loss within its clearing business after a single US hedge fund
52 // TheTRADE // Fall 2020