Some Funds Make Good Collateral

Chidem Kurdas

It’s hard to get a loan these days. Even borrowers with substantial assets find that banks are picky about what they’ll accept as collateral.

Certain hedge funds are widely used for this purpose, says an investor. But others are out of the question—banks won’t touch them with a 10 ft pole. This factor is influencing investors’ decisions as to which funds to put money into.

Banks will usually take certain Paulson & Co. funds, which have a strong long-term strong track record, said the investor. This means the shares of the Paulson fund are held by the bank as security against the credit provided to the investor.

Since the property slump and crisis of 2008, banks have become wary of funds that hold real estate or long-term debt.  The value of these investments is uncertain because they don’t trade. For the same reason, private equity or hedge funds that have similarities to private equity – like investing in illiquid assets – are typically not acceptable as security.

Holdings of long/short stock funds are more likely to be approved by banks, since market prices are available to track the value of the portfolios. But if a fund has restrictions on redemptions, it becomes less acceptable. This is one reason investors want better liquidity in fund shares—the ability to redeem at relatively short notice helps make fund shares acceptable as collateral.

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One Response to “Some Funds Make Good Collateral”

  1. Citadel Retains Collateral Status « HedgeFundSmarts Says:

    […] equity investments are typically not accepted as collateral because lenders want relatively liquid assets. Like this:LikeBe the first to like this […]

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