Deaglo saved a Credit Fund Manager $296,800 a year and improved annual fund return by 1.5%

Key Takeaways

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New and Emerging managers are often subject to poor rates and worse collateral terms than their larger peers due to their lack of trade volume and history. 

Reducing your hedging costs brings you in line with the bigger competitors allowing you to boost returns and attract more investors. 

Improving your investor returns could lead to increased subscriptions and stronger relationships.

Background

The client was investing in European debt and had hedged share classes in both USD and GBP totaling EUR 20m of AUM.

The client (like most new funds) was required to post 10% in collateral with their bank and were being charged 18bps per month to roll their hedges. Their Return on Investment (ROI), assuming no FX movement, is a consistent 5%.

Methodology

Deaglo ran a Transaction Cost Analysis to draw out the costs and determine the impact that the collateral and roll costs would have on the performance of the fund.

 

It was important to understand how much investor capital was tied up in collateral as this could significantly reduce the performance.
 

Annual collateral costs = Collateral * ROI  = EUR 100,000

The total spread costs were then calculated

Annual execution costs = Annual volume / 100 * monthly roll cost = EUR 388,800

 

Additional investors were not expected to join the share class; therefore the roll amount stayed at 18m EUR per month.

 

Once we had determined the impact we worked with both existing and new providers to reduce the collateral and the roll/swap costs.

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Results

Through our preferred hedging partners we were able to reduce the collateral for 1 month hedges to 0% for initial margin and also variation. 

We were able to showcase the potential savings for switching providers and the subsequent value this would have for their investors. The key results were as follows:

Annual Collateral Drag = 0%

Provider A annual costs = EUR 192,000

Savings = EUR 296,800

Deaglo saved the client EUR 296,800 on an annual basis and also improved their funds' predicted returns by 1.48%.

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The bar chart below shows the old returns and the new returns over a 3-year period.

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The bar chart below shows the old returns and the new returns over a 3-year period.

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The Conclusion

Understanding the impact of collateral drag and FX fees on overall returns is important for emerging fund managers that need to squeeze out every drop of return.

The improvement meant the client became more appealing to investors. Their share class improvement meant some of their current investors increased their investments and they were able to win new investors; this grew their AUM from 20-100m Euros.