Asset Managers Explore Leveraged Investing

As a result, asset managers are diversifying their business models by moving into or expanding their activities in leveraged investing.

According to the survey report, leveraged strategies are viewed as an important and useful, but not critical, part of the evolution of the traditional asset management industry. A small group of asset managers remains highly committed to 130/30 strategies; 9% of survey respondents said that this style was a priority for their firm.

Sixty-five percent of respondents now manage a long/short portfolio—nearly double the number in 2008, the report said.

The survey found that 43% of traditional managers kept leveraged assets with their custodians compared to 57% who custodied with their prime brokers.

When selecting a prime broker, the cost of domestic equity financing is the prime concern to traditional asset managers. At the same time, financing is viewed as a commoditized service with little room for differentiation between providers, according to the report. Some managers are concerned about other areas, including market research and trading tools.

Finadium said that prime brokers can capture and retain clients by integrating their offerings with their clients’ operations, reporting, and financing needs. This often requires a consultative sales approach.

The survey found that traditional managers are just starting to look at multi-prime brokerage relationships and operations.

In addition, Finadium found that 63% of managers are using over-the-counter (OTC) derivatives in some capacity. The firm said it expects that the use of derivatives at traditional asset managers will continue to increase, but a significant increase in OTC derivatives use would likely strain the resources of the traditional asset management community, requiring either new investments or outsourcing.

Finadium expects the march of traditional asset managers towards leveraged investing to remain strong, and suggested that properly managing the challenges related to shorting securities and optimizing balance sheets through portfolio margining, exchange-traded derivatives, and swaps will be critical to the long term success of traditional managers in these strategies.

The report is based on telephone and in-person interviews with 27 asset managers with average assets under management of $350 billion.