Prime brokers are not the only ones asking for more money as the sell-off continues (“Hedge funds hit with steepest margin calls since 2020 Covid crisis amid global rout”, Report, April 5).
As banks ask hedge funds to fork out more capital to cover their trades, the wider market may soon face a similar scenario if the sell-off continues.
Unpredictability of what’s to come is causing volatility. Volatility is now driving margin calls across the board, in equities, commodities, FX and more.
We advise asset managers and commodity traders how best to manage their margins to make the most out of their capital. In our experience, in times of market volatility, prime brokers are the first to make margin calls but the rest of the market will not be far behind.
The world’s clearing houses, which act as both the buyer and seller of a trade, will be asking their members for more cash as the value of holdings decline — at a rapid pace. With losses in some cases in double digits, these calls could be significant.
In the non-cleared, over-the-counter, market, the problem may be even more acute. Risks aren’t pooled into one giant fund; traders will need to carefully consider who is on the other side of their trade or be left with a trade that can’t be fulfilled.
With some indicators of volatility, such as the Vix, doubling in less than a week, it could become cost-prohibitive for some investors to even trade the market. Investors use derivative markets to hedge future price fluctuations, but in a world where collateral requirements grow to more than 50 per cent of contract value, trading could be a non-starter for many.
More troubling is the potential of a long squeeze as margin calls increase, with traders being forced to sell some of their holdings to generate cash, leading to further price declines and ultimately a “death-spiral”.
This could also lead to sell-offs in safe haven assets such as bonds as traders look to restore cash buffers.
There have been spikes in margin calls in the recent past — the American video game and consumer electronics retailer GameStop; nickel in March 2022; natural gas in Europe in the autumn of the same year. However, they were broadly confined to their respective markets. Now as investors price in a potential recession — revising valuation across all assets — traders must be vigilant in ensuring leverage doesn’t turn into over-leverage.
Jo Burnham
Margin Expert, OpenGamma, London EC1, UK
