Strategic Alpha Generation: The Evolution of the Hedge Fund Treasury Function in an Era of Complexity (J.P. Morgan)

August 2014

KEYWORDS:

Authors:

J.P. Morgan

Organizations:
  • J.P. Morgan

Summary:

As the financial industry adapts to an era of increasing complexity, the hedge fund treasury function is growing in
strategic value as a key differentiator among hedge fund managers. This quarterly Perspectives piece discusses how
hedge funds across strategies and scale can structure their treasury functions to optimize counterparty relationships and internal financing decisions.

Traditionally, many hedge fund treasurers – or, for hedge fund firms without a dedicated treasurer, executives with
equivalent responsibilities such as COOs or CFOs – have focused primarily on cash and collateral management,
counterparty risk, margin requirements, financing and leverage. With the changing environment, hedge fund
firms may enhance their treasury functions to play more of an advisory role, focusing increasingly on strategic alpha
generation, i.e., maximizing efficiency and transparency to maximize returns for investors.

There is no one-size fits all model for the treasury function and structure may be driven as much by complexity and
strategy composition as by scale. For larger hedge fund firms, particularly multi-strategy, this may mean organizing
and empowering treasury desks so that counterparty usage1 and financing costs can be allocated efficiently among
their various investment teams and funds. For smaller or single-strategy hedge funds that do not have a treasury desk
per se, it may be necessary for the COO or CFO – working in tandem with the CIO – to manage borrowing from,
and payments to, bank counterparties so as to optimize investment returns. This report considers the key issues that treasurers and hedge fund principals will need to contemplate as the hedge fund landscape continues to evolve.