Investment banks’ prime brokerage divisions are lowering their credit-quality control standards in greater numbers to better compete for European hedge fund business, according to a study by Greenwich Associates. The report found that, while more than 45% of dealers in 2004 refused to accept credit collateral of lesser quality than government bonds and agency securities, just a year later, 70% are accepting the lower-quality collateral. What’s more the proportion of dealers listing below-investment grade bond as the lowest quality of collateral they would accept has zoomed from 11% to 38%.
The Greenwich study also stated that a growing number of Euro hedge funds – 14% vs. 7% a year earlier -- consider capital introduction as an important factor when selecting a prime broker, and that leverage is on the rise, with 49% of Euro hedge funds reporting leverage ratios higher than three, compared with 23% the year before.