A new way to free up capital

Mon May 1, 2006

Pilot portfolio margining program puts options and securities together

A few months back, a multibillion-dollar hedge fund trafficking in broad-based index options and exchange-traded funds reduced its regulatory margin requirement by a startling 80% - simply by setting up a new account with its prime broker. The fund's move was made possible by a little-used portfolio margining pilot program approved by the U.S. Securities and Exchange Commission. And in dollar terms, the savings were impressive: The fund freed up some half a billion dollars in capital.

For leveraged funds, the capital required to maintain equity positions has always been of keen interest. Initial margin, or the amount an investor must post as collateral for a loan, can tie up an enormous slug of capital. Under the Federal Reserve's Reg T, which governs onshore financing, for example, the initial margin for equities is 50%. Long options have it even worse as...

ISSN: 2151-1845 / CDC10004H


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