Buy-side forced to find new methods of financing

Asset managers will have to find new sources of funding and liquidity as balance sheet pressures continue to hit banks.

Asset managers and hedge funds are facing increased pressures to find new ways of self-financing, as balance sheet pressures on banks continue to impact client relationships.

According to new research of global buy-side firms from BNY Mellon, it found balance sheet pressures for dealers in global funding markets, such as repo and securities lending, are forcing asset managers to locate new sources of funding.

“Many of our institutional clients are finding it challenging to fund themselves through traditional channels. This has spurred new ways of thinking, as firms look to diversify their funding, and it’s also driving the emergence of collateral as a new asset class with higher performance thresholds,” said Michelle Neal, CEO, BNY Mellon Markets.

From a survey of 120 buy-side firms conducted by BNY Mellon, it found more than 70% of hedge funds are looking to consolidate their existing prime broker relationships.

Hedge funds have been cited of frequently switching prime brokers due to ‘dissatisfaction with quality of service’, according to a survey from Preqin in May.

Switching service providers is not a routine process for hedge fund managers, showing how their own cost pressures – such as constant fee scrutiny and funding – are forcing them to re-assess their relationships.

The BNY Mellon survey also found that asset managers are turning to new participants to source liquidity, with many banks withdrawing from market making activities due to balance sheet pressures.

“Respondents also believe that the continuing balance sheet pressure on sell-side institutions has constrained the ability of many traditional bank market makers to adequately service their liquidity requirements. As a result, many executives are seeking new relationships to backstop their existing liquidity providers,” added Neal.

“The focus in this new environment is to provide access to more and different relationships to better meet the liquidity demands of our clients.”

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