NEW YORK (Reuters) - Tighter capital rules being imposed on banks to reduce risk in the financial system are starting to trickle down to hedge funds looking to borrow money to trade.
A J.P. Morgan & Chase (JPM.N) executive said Thursday the tougher capital holding requirements for banks mean some hedge fund borrowing costs will rise in the coming years. And that could make some trading strategies that rely on higher levels of leverage, or borrowed money, more costly.
Teresa Heitsenrether, JP Morgan’s Global Head of Prime Brokerage, said at the Reuters Global Investment Outlook 2013 Summit that, going forward, Wall Street banks will ask hedge fund clients to put up more collateral in exchange for some borrowings in order to reduce the risk to the banks making the loans.
Heitsenrether said new capital requirements for banks will stop their prime brokerage divisions, which provide financing, clear trades and provide other services for hedge funds, from again supplying the sky-high leverage seen before the financial crisis.
“The capital rules are going to prevent going back to old bad habits again across the industry,” Heitsenrether said. “The capital environments are going to be onerous enough that it will just not make economic sense to get beyond certain reasonable limits in leverage.”
Hedge fund managers are quickly becoming more familiar with the changing bank regulations and how that will impact their trading strategies, she said.
The decisions on how much leverage to allow will be made on a case-by-case basis, said Heitsenrether, who was promoted to oversee JP Morgan’s global prime brokerage business six months ago.
“There are certain portfolios where higher degrees of leverage are appropriate, and we’re comfortable when we feel like the risks are very well managed and the strategies are very liquid,” she said. “There are others where that’s not the case.”
Prime brokerage remains a place of fierce competition among the banks as the $2 trillion hedge fund industry continues to grow. JP Morgan, which is the biggest U.S. bank by assets, has been expanding prime brokerage around the world, including Asia.
(For other news from Reuters Global Investment Outlook Summit, click here)
Reporting By Svea Herbst-Bayliss and David Henry in New York; Editing by Matthew Goldstein and Gunna Dickson