[ I N - D E P T H | P R I M E B R O K E R A G E ] client trading futures and options failed to meet margin calls .
“ The crisis showed what happens when you have an asset class disconnect , and how the algos could operate in that space when there is that level of volatility ,” explains Anthony Bennett , prime brokerage lead at consultancy firm Capco .
However , not all hedge funds were hit as badly , and some were even able to turn huge profits , sparking ‘ Big Short ’ comparisons . This was particularly the case with certain credit and macro funds which bet on currencies , interest rates and commodities .
US hedge fund giants including Citadel , Millennium Management , and Point72 Asset Management emerged as some of the industry ’ s biggest winners from the crisis .
“ We ’ ve seen massive dispersion in performance across our client base including within the same strategy as a result of this year ’ s dramatic moves in both directions for global equities markets . Some clients were caught offside not de-risking or recalibrating when equities crashed while others were not convicted enough to play the upside when markets rallied ,” says John Dlublac , EMEA head of prime services sales and prime derivatives services , Credit Suisse .
Some hedge funds were also able to protect themselves from clients withdrawing their money overnight and were able buy time around how to manage their portfolios .
“ Most hedge funds do not have overnight redemptions , so this was not a situation that required immediate adjustment for capital levels changing , there was time to think about how to position their portfolios . Because a lot of hedge funds are naturally hedged , while they faced pressures on the long side they were able to benefit from , for example , shorting indexes ,” Aldoroty adds .
What became clear for both hedge funds and prime brokers was that in order to navigate the storm , clear communication lines had to be set up . Near real-time information flows around liquidity , financing , and margin calls were needed in order for hedge funds to manage losses and cover exposures .
In order to achieve this , a whole new communication infrastructure had to be set up to enable prime brokers to contact their hedge fund counterparty that was now working from home .
“ When you go through uncertainty in the market , as we went into working from home , consistent and clear communication was critical to the continued functioning of operations and funding ,” says Stephane Marchand , head of international prime finance and clearing sales , JP Morgan .
With record outflows from bond funds and billions more from stock funds during this period , many firms began seeing the value of their collateral fall , further exacerbating the dilemma they faced . According to one Bloomberg opinion article published at the end of March , the author described the situation as a ‘ system-wide margin call .’
The big margin calls The challenge for prime brokers was to guarantee stable lines of communication to individuals in the treasury departments and back-offices of hedge fund clients to ensure they were able to provide collateral in a timely manner .
“ The most important thing clients are looking for is stability of financing provision and of your margin regime . During these volatile times , we provided clarity about margin calls and how clients were going to meet them ,” explains Jon Cossey , global head of prime finance , JP Morgan . “ We quickly worked through some operational obstacles pertaining to the infrastructure of the hedge fund community when there were meaningful margin calls that had to be met .”
More often than not , prime brokers have the last word in deciding what a position is worth , and therefore how much collateral to demand . Yet some of the systems prime brokers use to calculate how much collateral to ask for cannot factor in the extraordinary market conditions firms are facing , and as
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