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Alternative Market Briefing

Hedge funds see increased margin calls, liquidity pressure as markets react to coronavirus

Friday, March 27, 2020

Bailey McCann, Opalesque New York:

The coronavirus crash has been steep and we may not be done yet according to new data. Treasury management company Hazeltree released a new research note today suggesting that hedge fund managers should prepare for increased margin calls alongside continued liquidity pressure.

Hazeltree saw a 20% increase in margin calls across its hedge fund clients trading collateralized derivatives in February and March. In response to the uptick in margin calls as well as redemption requests from investors, Hazeltree is reporting significant growth in hedge fund cash positions. Cash in US money market funds has grown to $3.7 trillion, the highest level since 2008.

In addition to moving to cash, hedge fund managers are delevering strategies. Equity long/short managers have cut leverage to under 200% from as high as 230% at the beginning of February.

On the credit side, it is likely that managers will have to be prepared for continued declines in investment-grade corporate credit and high yield. Data released today from MSCI predicts that investment-grade and high-yield bond portfolios could sink a further 8% and 19%, respectively. Sector performance would vary under this scenario, with spreads in the energy sector impacted most and those in health care impacted least.

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