Hedge fund managers are increasingly relying on administrators rather than prime brokers for financing through repurchase agreements (repos) amid recent growth in credit strategies in Asia, observes Wells Fargo.

Christopher Kundro, senior vice-president and co-head of the US bank’s global funds services division, notes that over the past six months he has seen more long/short hedging strategies in Asia expanding out of equities into credit.

In response his team recently hired a hedge fund admin sales executive, Johnson Har, based in Hong Kong – the firm’s first marketing exec in Asia outside of its 40-strong Singapore hub – and it started offering services from the city this August.

He estimates there are now around three-dozen hedge funds in Asia running credit strategies, which require operational support involving complex valuation of derivative instruments and collateral management.

“The difference between equity and credit funds administration is that credit funds are more challenging to administer – the valuation, the settlement and clearing of credit and fixed income instruments are more complex,” Kundro says, “and often administration of these credit funds involves a lot of cash and collateral management. If these funds trade in emerging market credits, it would make their operations even more challenging.”

Aside from Singapore, Wells Fargo also has hubs in Minnesota and London. It has 150 hedge fund clients, with “a little over 20” Asia-based managers. It manages $26 billion in assets under administration (AUA), and provides mid- and back-office outsourcing to 75% of this asset base.

Its Singapore hedge fund admin team helps clients to obtain financing through repos and reverse repos, enabling managers seeking to short bonds to transact with long managers who are willing to lend these bonds out to generate additional income during the tenor of the repo contract.

Kundro’s team provides mid- and back-office support such as trade confirmation, keeping track of the movement of securities and cash settlement with counterparties at daily market close. At the end of the month, his team does monthly reconciliation of all open repo positions.

“In the post-Lehman world, most prime brokers have balance-sheet constraints and they are not as readily giving out leverage to clients as in the past,” Kundro points out.

“Most of the time managers would do short-term repos ranging from overnight to two weeks, whereas pre-Lehman the tenors were longer as managers preferred using open-repo to roll positions every day.”

Kundro notes, too, that hedge fund managers typically sign Global Master Repurchase Agreements (GMRAs) with banking counterparties, using US dollars as margin top-up.

But while most credit managers have GMRA in place, repo-financing activity remains low by managers in Singapore.

Wells Fargo started its global fund services operation in Singapore in 2007, with the core of its business coming from US agricultural commodity firm Cargill, which set up a team in Singapore in 1995 to support its global proprietary trading activities.

The prop-trading desk was subsequently spun-off and launched as hedge fund Black River in 2003. Internal fund admin and back-office support for Black River was commercialised as a separate business in 2007 called Lacrosse – which was subsequently acquired by Wells Fargo last December.