Margin rates and crowding: Acuiti report delves into challenges for hedge funds

Rick Steves

“The rate rises are putting pressure on funds to increase returns. However, the volatility in the rates market and its impact on equities is also creating opportunities for funds.”

Hedge fund executives are wrestling with challenges ranging from rising margin rates to investment strategy overcrowding, according to a recent report from Acuiti Hedge Fund Expert Network.

Based on a quarterly survey involving global senior executives from hedge funds, the Acuiti report reveals significant margin pressures are weighing on the industry.

Margin finance rates increased more than base rates for 73%

A staggering 73% of respondents stated that margin finance rates have increased more than base rates in the first half of 2023. Such margin pressures compound operational costs for hedge funds, particularly as they navigate an environment of rising interest rates.

While rate hikes can offer investment opportunities, they also reset investor expectations for returns. The report noted that nearly half of the surveyed executives see raising capital as a critical challenge, underscoring the heightened competition for investor dollars.

Will Mitting, founder of Acuiti, highlighted the dual pressures from rising rates and margin costs: “The rate rises are putting pressure on funds to increase returns. However, the volatility in the rates market and its impact on equities is also creating opportunities for funds,” he said.

Over half worried about “crowding” of investment strategies

The report also delved into the hedge funds’ evolving attitudes towards cryptocurrencies. Interestingly, 38% of respondents not currently trading in cryptocurrencies would either definitively engage (9%) or consider engaging (27%) once a clear regulatory framework is established in their home jurisdictions. This signifies a growing comfort level with digital assets, contingent upon regulatory clarity.

Another standout finding was the growing concern among hedge funds about the “crowding” of investment strategies. Over half of the respondents worried that this phenomenon is increasing market risk and volatility, potentially undermining the stability and predictability of returns.

As hedge funds grapple with these challenges, optimism seems to be on the decline. Only 63% of the surveyed executives were optimistic about their business performance over the next quarter, down from 72% in the previous survey.

In summary, hedge funds are confronting a milieu of challenges, from climbing operational costs to an uncertain regulatory landscape for emerging asset classes like cryptocurrencies. How they adapt to these issues will likely set the tone for the industry in the coming months.

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