Last summer’s meltdown of cash manager Sentinel Management Group and the recent blowup of Bear Stearns have once again brought the issue of cash management to the forefront for hedge funds and their investors. Horizon Cash Management recently created a due diligence guide to help fund managers and their clients understand the differences between active cash management, which it preaches, and passive cash management, which it warns against.
FINalternatives spoke with Bob von Halle, managing partner and director of business development at Horizon, about the changing perception of this not-so-sexy but integral part of the money management business.
FINalternatives: How has the turbulence in the hedge fund space and the financial markets in general affected Horizon?
von Halle: Having been involved in the fixed income market since 1982, I’ve seen 26 years of financial market debacles and this is the first time I recall a debacle starting on the cash side of the business. It’s either been in currency markets, emerging markets, junk bonds, or mortgage-backed securities.
Generally speaking, our area is not that sexy and if it is, generally it is for the wrong reasons. The cash management business should be quite boring, focusing exclusively on liquidity and safety, but it’s been anything but boring with all the problems in our space caused by other firms and bond funds straying from their core mission. That has been the key reason we have seen a renewed interest in our product, as we never strayed from our focus on liquidity and capital preservation.
FINalternatives: What is the general perception of cash management today?
von Halle: Most people view cash management as a fallout of their prime broker or clearing firm relationships. A lot of funds simply get a fixed crediting rate, usually some benchmark less a spread. Often, fund managers don’t spend a whole lot of time thinking about this. But we’re now seeing a huge reexamination of this practice because people are starting to realize that they’re getting negative real returns on their cash investments.
FINalternatives: What is the relationship between hedge funds and their prime brokers and clearing firms when it comes to cash?
von Halle: With the prime brokerage community looking to shrink their balance sheets to reduce their leverage and exposure, all of a sudden not all hedge funds and strategies are created equal. There are some strategies that prime brokers don’t necessarily want to finance just because they compound the risks they already have on their own books. Some hedge funds have called us and told us their cash was getting a haircut from their primes, which were offering them below market rates to make it less attractive to keep their money there.
[Meanwhile], some of the clearing firms are looking to increase margin requirements dramatically. You’ve seen various thinly traded commodities trade up dramatically, so margins have gone up from 10% to, in some cases, 100%. With the clearing firms doing that, we’ve had some clients saying, ‘We don’t want our cash sitting there potentially up for grabs at the whim of the clearing firms.’
So, there are a fair amount of defensive plays going on among the hedge fund community where they don’t want to be in the position of being totally beholden to their prime brokers and clearing firms.
FINalternatives: Are funds of hedge funds showing interest in cash management?
von Halle: Historically, [funds of hedge funds] have not been core clients of ours because they’ve always been fully invested and don’t carry a lot of excess cash. However, they’ve seen increased volatility in the hedge funds that they allocate to, and it’s becoming hard for them to sell one strategy to fund another. So we’re seeing interest from them in setting up a 5% type of cash buffer where they always have some kind of cash on hand to fund strategies, and then they’ll sell what they want to sell at a later point in time.
by Hung Tran