Hedge fund assets available for prime custody services now stand at an estimated USD684bn, a 40 per cent increase since 2010, according to BNY Mellon.
The increase reflects both growth in overall hedge fund assets under management as well as lower levels of borrowing from prime brokers.
Roughly half of all hedge funds with more than USD1bn in AUM are now thought to have a prime custody agreement in place, up from 15 per cent in 2008 as funds increasingly seek to mitigate counterparty risk.
Prime custody refers to the tailored servicing of unencumbered assets within alternative investment portfolios, performed by both prime brokers and custodians to provide greater transparency and risk mitigation.
Produced in conjunction with research and consulting firm Finadium, the report, “Prime Custody Comes into the Spotlight,” outlines prime custody’s growing importance to hedge funds and how global custodians are supporting this market. The paper also analyses the structural changes that are fuelling growth, including an increase in fully paid/unencumbered assets – such as investments in financial products which themselves contain built-in leverage – and a heightened awareness among institutional investors of potential counterparty risk.
“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,” says Marina Lewin (pictured), managing director at BNY Mellon’s Alternative Investment Services business. “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.”