WEST PALM BEACH, FL (HEDGECO.NET) – There is stiff competition between U.S. and European banks for lucrative business of the booming hedge fund industry, according to Reuter�s news reports. Suchcompetition may be producing other undeserved consequences; it may be pressuring margins and also weakening credit controls, according to analysts at prime brokerage companies. This disclosure wasmade at the Euromoney conference.
According to Lambert, head of European prime brokerage at Bear Stearns, “European commercial banks are setting up prime brokerage units to compete with U.S. investment banks as hedge funds represent a significant part of the bottom line for financial institutions�. According to Moody�s reports, hedge funds generated $7.5 billion in equity-related fees alone in 2004; about 40 percent of the fees went to prime brokers.
The new competition Lambert explained may be feeding �through into the terms of credit provision by prime brokers. Some are taking a stress testing analytical approach which is quite conservative, while others are using value at risk (VAR) models which allow much higher levels of leverage.�
According to Lambert, margins at which prime brokers lend money to hedge fund firms have shrunk to the level between 40 and 62.5 points. This margin stood at 75 basis points over the past three years. Moody�s had earlier warned of the new risks of multiple failures for hedge funds that may result from the growing number of unregulated hedge funds, which take on the same risks as hedge funds.
Paul Oranika
Editor-in-Chief
HedgeCo.Net
Email: Editor@hedgeco.net
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