The current wave of hedge fund deleveraging is over and the industry is set to see few further fund collapses, although some funds may yet suspend investor redemptions, a senior executive at HSBC Halbis said on Monday.
The spike in market volatility since the credit crisis began last year has been attributed in part to hedge funds rushing to reduce leverage.
This has been triggered by their own caution, by the need for investor redemptions, or because of pressure from prime brokers who provide financing for trading and settlement of trades.
However, speaking at the Reuters Hedge Fund & Private Equity Summit in London, Bill Maldonado, HSBC Halbis Capital Management’s head of alternative investments, said the current wave of deleveraging seems to be over because prime brokers are now sitting on record cash balances.
“In discussions with other fund managers, with the prime brokers, it would seem to us that the deleveraging that was going to happen for the moment has happened,” Maldonado said.
“Not only have people deleveraged but actually they have taken off risk on the cash portion of their portfolios.
“The vast majority of funds have actually got idle cash balances sitting at the prime broker that they could deploy tomorrow if they wanted to.”
This could reduce market volatility and might mark the bottom for some assets hit by heavy hedge fund selling in recent months.
It is my view that the deleveraging by hedge funds is over until of course, its not and they have to sell something else. I think its important to differentiate into selling because of redemptions or forced deleveraging from its prime brokers to a more “comfortable” level of leverage that will be the new norm. So this low volume could be a function of a lower leverage environment in the hedge fund world. It would be safe to say that hedge funds make up a substantial portion of the daily trading volume and if they have less shares to play with, less shares will therefore trade.
