Market neutral equity capital efficiency
Wondering if anyone can provide insight into how capital efficient market neutral long/short equity is, from a balance sheet/ margining perspective.
Now that rates are materially higher than 0, I'd like to understand what the capital considerations are to running one of these books. I understand futures margining much better.
For example, at a MM you are typically tasked with running an $XXX million GMV book in equities, let's say 500M. Typically you are looking to return 2-3% on that GMV. Certainly you are not required to post the aggregate 500M of gross exposure from the balance sheet as a margin requirement, what are the typical percentages as a function of GMV required to post as "margin capital" for these books? Is that number materially affected by the fact that rates have risen?
Hi PM in HF - RelVal, any of these discussions helpful:
More suggestions...
If those topics were completely useless, don't blame me, blame my programmers...
For every long costing you 4.5% to finance, there is a short earning a 4.4% rebate. So, no. If it's truly market neutral, higher rates don't really matter.
Agree except the spread in the middle is bigger than 10 bps.
longs fund at OBFR + margin and shorts rebate at OBFR - borrow cost.
If your treasury department has a lot of bargaining power and you don’t short HTBs, then you’re lucky if that spread is 50bps. More likely it would be 55-60bps.
don’t forget that (at least some and maybe all) pods charge pms on underlying equity too which helps neutralize funding costs at a fund level.
also - the larger pods net off internal exposures to save financing costs to the street but pms pay that cost regardless of if it is paid externally. so that’s one more way that the business reduces overhead costs.
Gotcha thanks for the replies! What about margining requirements (as opposed to borrowing/financing costs)? E.g. how much capital do you have to post with the broker of you are running an $XXX million GMV book? I understand that the financing most likely offsets but certainly if you are running bigger GMV you will have to post more dollars in margin? I know there is Regulation T which requires brokerage accounts to post 50% of their long exposure in margin, but not sure if that applies only to retail or also to institutional accounts.
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