US hedge funds are showing a renewed appetite for equities, with equity commission revenue expected to grow to US$4 billion in 2010, according to consultancy TABB Group.
In ‘US Hedge Fund Equity Trading 2010: Commissions, Volumes and Traders’, TABB Group asserts that many hedge funds are now looking beyond the difficult market conditions experienced during the financial crisis in 2008 and 2009 and are now rebuilding their asset bases and increasing leverage.
During the financial crisis, hedge funds suffered mass outflows and redemption requests from clients, which left many traditional market participants fearing that the sharp exit of hedge funds from equity markets would contribute significantly to reduced liquidity and increased volatility.
Now however, TABB predicts a 9% increase in hedge fund equity commissions in 2010. Furthermore, while the share of US cash equities traded by hedge funds declined to 14% of total volumes in January 2009, compared to 27% at the start of 2007, the study notes a rebound to 21% at the end of January 2010.
Hedge funds are increasingly selecting their brokers depending on whether they are idea-driven funds or want access to markets via their brokers’ connections to implement their own quant-driven models. For model-driven funds, latency will be a motivating factor in broker selection, while access to liquidity will be a key differentiator for idea-driven funds, the report observes. Core brokers were found to account for between 76-78% of hedge fund equity commission regardless of fund size. Goldman Sachs, Morgan Stanley and Credit Suisse were each found to have relationships with four out of every ten hedge funds.
“There is ample opportunity for the sell-side community to fine-tune their hedge fund value proposition,” said Matt Simon, research analyst at TABB Group and author of the report. “Those who leverage services of the cash equity desk and prime brokerage relationship into a more holistic engagement will have the best chance of succeeding. Building out components that hedge fund clients value for equity trading will be a primary driver for greater revenue opportunity.”
The study surveyed 57 head traders of US hedge fund companies managing an aggregate $182.1 billion in assets under management.