Hedge Funds’ Money Management Snag

Regulation is pounding down on hedge funds and other buy-side organizations, which are now pressured to move their cash — making treasury and cash management less transparent and less efficient.

Treasury technology firm Hazeltree, which targets clients in the hedge fund space, is offering a new tool for customers to move liquidity out of banks and into money market and treasury funds. Sameer Shalaby, president and CEO of Hazeltree, explained to PYMNTS why that’s happening and how money movement can be a headache in terms of cash visibility.

Regulatory Impact

A wave of post-financial crisis regulation is changing the way hedge funds manage their cash. In particular, Shalaby said, Basel III is forcing banks to have hedge funds move their cash to protect balance sheets. It’s an unconventional shift that’s leading to some unconventional problems for hedge funds.

“It’s a little crazy, the world we live in, where banks don’t want cash,” Shalaby stated. “But that’s the world we live in — amazing.”

Strange or not, regulatory impacts on banks have introduced the challenge of hedge funds moving their cash to other vehicles where assets can remain liquid. Traditionally, the movement of that cash has been into money market funds and has been done manually.

“It was operationally inefficient because there was a lot of cash and, potentially, more than one money market fund they want to set up,” the executive explained. “Hedge funds have potentially several primary brokerage relationships, so they need to aggregate all of this cash, then sweep it out. From that perspective, it was an operational headache to just set up the sweep function.”

Not to mention, with suppressed interest rates, hedge funds were moving cash into money market funds without any yields — and, in some cases, with fees. But with interest rates preparing to rise, moving cash will be a necessity for hedge funds.

Basel III is only the start of regulatory impacts on hedge fund treasury management.

In addition to the almost-certain interest rate hike, hedge funds are also eyeing new rules from the Securities and Exchange Commission slated to come into effect next month.

“With the new rules, some of these money market funds are going to have gates, and they’re going to limit the ability to get money out whenever you want,” explained Shalaby. While the regulations aren’t expected to make a severe impact on the market, they will make it harder, in some cases, for hedge funds to access their liquidity at any time — a crucial need for these investors.

According to the CEO, this means hedge funds will want to move cash into funds like treasury funds to ensure their cash remains liquid, and that means yet another wave of cash movement.

Cash Management

Hazeltree is reacting to regulation like Basel III, as well as incoming rules, with the launch of LiquidityWeb, a function for its hedge fund clients that allows them to select their cash balances, aggregate them and move them via wire into a single money market fund.

With this process traditionally being done manually, Shalaby said Hazeltree is looking not only to make it faster for hedge funds to reposition their cash but to gain a clearer view of their cash positions overall by allowing clients to continue to monitor their funds and where liquidity exists.

“Our focus has been on this regulation that’s pressuring the industry to move cash out of the bank, as well as on interest rates that are likely to move up,” he explained. “We’re seeing hedge funds take advantage of that.”

But it’s also about enabling better cash management overall. “All of our efforts are to help our clients with overall treasury and, more specifically, cash management,” Shalaby added.

The first partner to integrate into the LiquidityWeb solution is Golden Sachs Asset Management, but Hazeltree said additional partners to receive hedge fund cash will join the platform in the near future.