Hedge fund strategies and performances are under strain as increasing margin finance rates rose faster than rate rises across the first half of 2023.
According to the latest quarterly survey of the Acuiti Hedge Fund Expert Network, the Acuiti Hedge Fund Management Insight report found that 73% of hedge funds had experienced margin finance increases in excess of the increase in base rates during the first half of 2023.
Compounding matters further, the increase in costs comes during a time in which more than 50% of respondents said their performance during H1 2023 was worse than expected and when interest rate rises are putting pressure on performance, with higher risk-free rates meaning investors are looking for greater returns from allocations.
However, it was raising capital that posed the greatest challenge to business’ during H1 2023, with 43% reporting raising capital as a critical challenge, with smaller funds hit particularly hard.
Acuiti founder Will Mitting said: “Increases in margin finance rates are part of a picture of rising costs for hedge funds. The rate rises are also putting pressure on funds to increase returns. However, the volatility in the rates market and its impact on equities is also creating opportunities for funds.”
Overall the level of margin finance has not changed significantly across H1 2023, with 84% reporting no change in availability during that time. However, the cost of finance is increasing for three quarters of firms and is rising significantly above the base rate for 20%.
Despite these challenges, there are some green shoots of opportunity. The survey looked at how the development of crypto regulatory frameworks in key jurisdictions would impact hedge funds’ approaches. Of those that weren’t currently trading, two thirds of respondents would either consider (27%) or definitely trade (9%) crypto once regulatory frameworks came into force.
These figures were higher than in Acuiti’s other Expert Network surveys covering asset managers, the sell-side and proprietary trading firms, suggesting that hedge fund adoption will be the most significant post regulatory wave into crypto assets.
Sentiment for the next three months is falling among the members of the Hedge Fund expert network dropping to 63% of respondents being either quite or very optimistic about the performance of their business over the next three months. This was down from 72% the previous quarter.
© Markets Media Europe 2023
