Cost of leverage
Trying to understand the cost of borrowing for pod shops and other > 100% gross L/S shops. Do these funds have to currently pay a rate above the risk free rate so that a lender can make a spread on the loan (> 5% seems like an expensive hurdle)? Or is the cost of debt substantially lower than that, with the expectation that if prime brokerage shops lend money at low rates to the funds, it is more than made up for with trading volume commissions? (Edited for clarity)
P sure interest rates move cost of leverage but you also get a rebate on your shorts so not a huge impact?
I'm not sure I understand what you mean. Don't these firms have to pay the borrow rate on their shorts. Why would it be an offset?
They pay to borrow the stocks but sell immediately; the cash earns interest in line with the higher interest rate. Get some form of netting
Makes sense, thanks for responding!
Bump
For long/short funds, they usually pay a rate above the risk-free rate to cover the lender’s risks. If rates are over 5%, that can be steep, especially for highly leveraged funds. Prime brokerage firms often offer lower rates to attract business, banking on the trading commissions they earn from the fund’s activity to make up for it. So, while some funds might borrow at lower costs, it really varies based on their relationships with lenders. It’s all about finding that balance between borrowing costs and overall performance.
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