As Leverage Drops, Prime Custody Grows

Sep 14 2012 | 10:45am ET

There's a new measure of just how much hedge funds are shying away from borrowing to boost returns in the wake of the financial crisis.

Hedge fund assets available for prime custody services have jumped by 40% over the past two years, BNY Mellon reports. While part of that increase is the result of growth in industry assets, it is also reflective of lower levels of leverage across the industry—since prime custody is available only to unencumbered assets.

"Hedge funds are putting far more emphasis on how they manage custody of their assets and increasingly looking to adopt best practices to ensure their counterparty risk profiles are optimized and meet investor requirements," BNY Mellon's Marina Lewis said. "BNY Mellon works in partnership with its extensive network of prime brokers, so clients maintain their current prime broker relationship but have the added benefit of holding their assets with an independent third-party custodian."

BNY Mellon's new report, produced with consultancy Finadium, shows that about half of all hedge funds with more than $1 billion in assets have prime custody arrangements, up 15% over the past four years. All told, some $684 billion in hedge fund assets are available for such services.

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