Bank of America cut ties with about 150 hedge funds last year in its prime brokerage group because new regulatory requirements designed to make the financial system safer are forcing lenders to reduce costs.
The second-largest U.S. bank made the decisions based on which client relationships were profitable enough to keep amid new capital and liquidity rules, according to two people familiar with the bank’s strategy, who asked not to be named because details are private.
Zia Ahmed, a spokesman for Charlotte-based Bank of America, declined to comment or say how many hedge fund clients the bank has.
Bank of America is pulling back from a push into prime brokerage after buying Merrill Lynch in 2009, as it sought to provide services including securities lending and cash management to the $2.9 trillion hedge fund industry. That business has become less profitable as measured by return on equity under new rules known as Basel III, which are being put in place to prevent a repeat of the 2008 financial crisis.
“Hedge fund managers should expect banks to become more discerning in their allocation of equity to support new and existing business – redirecting resources away from businesses that are expected to earn low returns on equity,” JPMorgan Chase wrote in a report last year on hedge funds and prime brokers.
The biggest prime brokers have trimmed relationships with or increased fees for hedge funds that don’t meet profitability targets. Last year, Goldman Sachs pushed some customers to move cash from the bank and cut back on some forms of client lending.
Certain hedge fund strategies require more financing, such as credit and quantitative funds. The higher capital rules mean banks have to profit more on each loan to get the same return they once earned.
The rationing on Wall Street comes as many smaller hedge funds struggle to survive amid lackluster returns and investors increasingly allocate money to large brand-name managers. A Hedge Fund Research Inc. report this week showed 661 funds shut down in the first three quarters of 2014. There are 8,362 hedge funds globally, according to the data provider.