Hedge Funds Adapt to the New Market Normal

BNY Mellon's Pershing


Hedge Funds Adapt to the New Market Normal

Pershing Prime Services Sees HFs Adapt to the New Market Normal
By Susan Barreto
Published by Alternatives Watch, April 27, 2020

It only took a few weeks into the new market normal for hedge fund managers to return to what they do best – hedging, according to Mark Aldoroty, managing director at Pershing Prime Services.

Aldoroty said that in early April, managers active in the equity space put on a lot of very broad market hedges such as ETFs or index-driven shorts, but it wasn’t long before there was a little bit of a return to normalcy with hedge fund firms shorting specific names and making investment theses.

“One of the things we are looking at is the speed and velocity at which you can short,” said Aldoroty in an exclusive interview with Alternatives Watch.

Aldoroty leads Pershing’s Prime Services and Collateral Funding and Trading teams. Prior to this role, Mark led the Prime Services Sales and Relationship Management teams having joined the firm in 2014.

He said so much depends on liquidity, so the redemption cycle of investors and financing will need to line up with managers’ investment portfolios.

HFR recently reported that hedge fund investor outflows totaled an estimated $33 billion in the first quarter, which was the largest quarterly outflow since investors redeemed $42 billion in the second quarter of 2009.

The first quarter outflow is the 4th largest in industry history, with the three largest outflows occurring from fourth quarter of 2008 through the second quarter of 2009.

Over the next quarter to six-months out from the pandemic he expects will have a great impact on the industry. “We are not seeing a specific trend in balances going up or down, it’s more situational,” Aldoroty added in that shows redemptions are not being logged currently.

Aldoroty is quick to point out that this market downturn is not another 2008 as leverage is not as high as it was then and bank/broker-dealer capital requirements are structured differently.

“The capital requirements at banks are more robust, so from my perspective there has been very few stress points at all,” he said. “Folks have been making margin calls, and everyone has been able to operate somewhat normally.”

Among the firm’s credit hedge fund clients, they are seeing more hedging activity, but he said that those funds were likely more hedged to begin with.

While there may have been less liquidity in certain underlying products such as municipal bonds, it can create pricing pressure. If investors want to get out it can put pressure on reducing price that can affect other holders.

So, the question remains on whether they can hold on until the markets stabilize and liquidity returns to normal.

Among hedge fund investors, many have reconsidered how they position themselves going forward. Pershing has been trying to help give their manager clients as much color as they can to help in the decision-making process.

Many investors are seeking to speak directly with their fund managers too, making this time extremely busy for all. Mostly managers are sticking to what they know and not making any dramatic strategy changes, he said.

At Pershing, the focus too has been on keeping business continuity in place as its team has been working from home dealing with the new normal just like the rest of the globe.

BNY Mellon's Pershing

BNY Mellon’s Pershing and its affiliates provide a comprehensive network of global financial business solutions to advisors, broker-dealers, family offices, hedge fund and ’40 Act fund managers, registered investment advisor firms and wealth managers. Many of the world’s most sophisticated and successful financial services firms rely on Pershing for clearing and custody; investment, wealth and retirement solutions; technology and enterprise data management; trading services; prime brokerage and business consulting.

Pershing helps clients improve profitability and drive growth, create capacity and efficiency, attract and retain talent, and manage risk and regulation. With a network of offices worldwide, Pershing provides business-to-business solutions to clients representing approximately 7 million investor accounts globally. Pershing LLC (member FINRA, NYSE, SIPC) is a BNY Mellon company.