Cash management, treasury operations, and banking relationships for hedge fund managers
Banking relationships for hedge funds operate differently than for most businesses due to the nature of fund structures and the presence of prime brokerage relationships. While prime brokers handle much of the trading and custody infrastructure, traditional banking relationships remain important for management company operations, investor cash flows, and treasury management. Understanding how these relationships interact helps managers optimize their banking infrastructure.
At the fund level, banking needs are often simpler than in other fund types because prime brokers handle much of the cash management. Subscription proceeds from investors typically flow through a fund bank account before being transferred to prime brokerage accounts for investment. Similarly, redemption payments and expense disbursements often flow through fund bank accounts.
The fund may maintain accounts for specific purposes: operating accounts for expense payments, subscription accounts for investor contributions, and redemption accounts for investor distributions. Some structures use escrow accounts during subscription periods or for specific regulatory purposes.
Bank selection for fund accounts considers several factors: willingness to bank hedge fund structures (not all banks actively pursue this business), wire transfer capabilities and cutoff times, integration with fund administration systems, and deposit insurance coverage for cash balances.
The management company maintains separate banking relationships for its operating needs. Management fees flow from the fund to the management company, which then pays salaries, rent, technology costs, and other operating expenses. These accounts function more like traditional business banking.
Cash flow timing creates working capital considerations. Management fees are typically paid monthly or quarterly in arrears or advance depending on fund terms. The management company must maintain sufficient liquidity to cover ongoing expenses between fee payments. This becomes particularly relevant for new funds where initial AUM may not generate sufficient fees to cover the full team and infrastructure costs.
Performance fees, when earned, flow to the GP entity or management company depending on structure. These payments are typically annual and create lumpy cash flow that requires planning. Some firms maintain reserves from performance fees to cover lean periods or invest in firm growth.
Effective treasury management for hedge funds involves coordinating cash flows across multiple accounts and entities. At the fund level, cash must be available for margin calls, redemptions, and expenses. At the management company level, payroll and operating expenses require reliable funding.
Short-term investment of excess cash balances presents options and considerations. Money market funds offer liquidity and yield. Treasury securities provide government backing. Bank deposits up to FDIC limits offer insurance protection. The appropriate mix depends on amounts involved, liquidity needs, and risk tolerance.
Foreign currency management matters for funds with international investments or non-U.S. investors. Currency accounts, hedging arrangements, and FX execution capabilities factor into banking relationship decisions. Some managers consolidate FX execution with their prime broker; others maintain separate bank relationships for currency management.
Hedge funds process significant wire volume: investor subscriptions and redemptions, margin transfers, trade settlements, and expense payments. Efficient wire operations require attention to authorization controls, cutoff times, and reconciliation processes.
Authorization matrices typically require multiple approvers for wires above certain thresholds. Segregation of duties between wire initiation and approval reduces fraud risk. Many firms implement callback verification for large or unusual wires. These controls balance operational efficiency with fraud prevention.
Wire cutoff times affect cash availability. Understanding when banks stop processing same-day wires helps ensure time-sensitive transfers settle appropriately. International wires may have earlier cutoffs and longer settlement times that affect timing of cross-border payments.
Hedge funds may encounter banking challenges that other businesses do not face. Some banks limit their hedge fund client base due to regulatory concerns or risk appetite. Account opening processes may involve enhanced due diligence given the investor types and trading activities involved.
De-risking by banks has affected hedge fund banking access in recent years. Managers may need to maintain relationships with multiple banks to ensure continuity if one relationship ends. Understanding why banks serve or decline hedge fund clients helps in relationship management.
Offshore fund structures may face additional banking complexity. Cayman Islands or other offshore vehicles need banking relationships in their jurisdiction of organization, which may involve different banks and processes than the U.S. management company uses.
Fund administrators typically have visibility into fund bank accounts for reconciliation and NAV purposes. The bank account structure should support administrator access while maintaining appropriate controls. Some administrators offer cash management services that integrate with their broader administrative functions.
Automating data flows between banks and administrators reduces manual reconciliation work and improves accuracy. Many banks offer automated reporting feeds that administrators can incorporate into their systems.