Deaglo saved a Credit Fund Manager $296,800 a year and improved annual fund return by 1.5%
The Client
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 was being charged 18bps per month to roll their hedges.
Their Return on Investment (ROI), assuming no FX movement, is a consistent 5%.
Key Takeaways
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.
Methodolgy
- Transaction Cost Analysis Overview
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.
- Collateral Impact on Fund Performance
It was important understanding how much investor capital was tied up in collateral as this could significantly reduce the performance.
- Execution and Roll Cost Assessment
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
- Stable Hedging Volume Assumption
Additional investors were not expected to join the share class; therefore the roll amount stayed at 18m EUR per month. Once we determined the impact we worked with existing and new providers to reduce the collateral and the roll/swap costs.
Results
- Collateral Optimization
Preferred hedging partners reduced initial and variation margin requirements to 0% for one-month hedges.
- Provider Cost Comparison
Cost analysis demonstrated significant savings potential by switching to alternative hedging providers.
- Annual Cost Reduction
Provider A’s annual hedging costs were EUR 192,000, generating savings of EUR 296,800.
- Performance Impact
Annual savings of EUR 296,800 eliminated collateral drag and improved projected fund returns by 1.48%.
