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Margin finance rises piling pressure on hedge funds, says Acuiti report

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The sell-side is increasing margin finance rates for hedge funds at a faster pace than rate rises, putting pressure on strategies and performance, the latest Acuiti Hedge Fund Management Insight report has found.

The report, which is based upon a quarterly survey of the Acuiti Hedge Fund Expert Network, a group of senior hedge fund executives from across the globe, found that 73% of hedge funds had experienced margin finance increases in excess of the increase in base rates during the first half of 2023.

The increase in costs comes during an average first half for many hedge funds. Over 50% of respondents said that their performance during H1 was worse than expected, although most said that it was in line with an average year.

The increase in margin finance rates is increasing operational costs for funds at a time when interest rate rises are putting pressure on performance. While interest rate volatility creates opportunities for some funds, the higher risk-free rates mean investors are looking for greater returns from allocations.

Almost half of respondents cited interest rate rises as a severe or critical challenge for their business during H1 2023, and 43% reported raising capital as a critical challenge – this was particularly an issue for smaller funds.

The report also found that 36% of respondents would either definitely trade crypto (9%) or consider trading it (27%) once a regulatory framework was established in their home jurisdiction, while over half of respondents are concerned that crowding of hedge fund investment strategies is increasing volatility and market risk.

Sentiment among hedge funds, meanwhile, fell last quarter, with only 63% of respondents optimistic about the performance of their business over the next three months, down from 72% the previous quarter

“Increases in margin finance rates are part of a picture of rising costs for hedge funds,” says Will Mitting, founder of Acuiti. “The rate rises are also 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.”

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