New York (HedgeCo.Net)- According to a recent study of financing options for hedge funds by Standard & Poor’s, the largest hedge-fund families manage $10 billion, $20 billion, and even $30 billion today, and at least 100 individual hedge funds have more than $1 billion in assets.

“Funds need to reach the multibillion level so they can access the broader range of funding,” explained Charles Davidson, director in Financial Services Ratings at Standard & Poor’s Ratings Services. Growth of assets size isn’t the way hedge funds attract even more assets. A track record that lenders and investors can evaluate is also important.

By now, many hedge funds have a performance history dating back eight to 10 years. The ability to post impressive profits over an extended period raises lenders’ and investors’ comfort level. Redemption restrictions that boost funds’ liquidity also help in obtaining financing.

“The size of assets and the more stable capital base give hedge funds options that they didn’t have before,” observed Mr. Davidson. These include IPOs and bond offerings. The funds find the more permanent nature of this financing especially attractive, since it makes them less dependent on banks and prime brokers.

If a crisis causes financing from banks and prime brokers to dry up, permanent financing can become a lifeline, enabling a hedge fund to ride out the liquidity crunch. It also enables funds to maintain less-liquid and longer-term investments.

These factors have enabled hedge funds to expand their financing beyond the traditional choices of collateralized loans through prime brokers, investors’ equity, and their own capital. The larger funds have added unsecured loans, bond offerings, and even securitization to the financing mix. And despite a few hedge funds that have experienced well-publicized problems, recent IPOs of these alternative investment vehicles have proved very popular. Standard & Poor’s published the study just this week, “Hedge Funds Find That Growth Opens Doors To New Financing Options”.

Alex Akesson

Editor
HedgeCo.Net
Email: Alex@hedgeco.net

Comments are closed.