Rising margin costs could slash hedge fund returns

Regulatory change may see hedge funds subject to 70% additional margins.

Hedge funds could see returns plummet due to additional margin costs set by clearing houses as a result of regulatory changes.

A report from analytics firm OpenGamma found that hedges funds could be charged as much as 70% additional margin, which would lead to severely reduced returns as a result.

Hedge funds most affected by the new margin rules are those looking to exploit price differences between two related markets, such as bonds against futures, and firms in this scenario may have to post significantly more margin for a large position by their clearing house.

“Making fund managers post more cash to guard against another financial meltdown is all very well in principle. But in practice, these rules trigger an enormous cost for the industry, which ultimately, will be shouldered by the very end investors rule makers are trying to protect,” said Peter Rippon, CEO of OpenGamma.

 “The bigger the hedge fund, the bigger the problem. The trouble is that it is becoming harder to gain real insight into the drivers of margin beyond what is reported by their clearing brokers. At a time when investors are scrutinising every penny, the last thing any portfolio manager needs is to be hamstrung by unnecessarily posting more margin than they have to.

Funds that could be particularly hit by these changes as global macro funds, which achieved returns of only 2.3% in the last year.

However, understanding the nuances of new margin models requires significant investment from fund managers.

 “Some are already finding ways around this issue, which is why we are seeing more firms turn towards in-depth analysis in order to seek out opportunities to reduce margin,” added Rippon.