Margin Finance

The margin policies are strategy-specific and are based on a portfolio approach, incorporating all products related to the same investment strategy. This cross collateralisation of products optimises the use of capital for the hedge fund manager, and provides a single margin requirement that is reflective of the overall risk.

For long/short equity portfolios, the margin requirement (or 'haircut') is generally a single percentage number applied equally to every position. This simplified figure is set at a level that provides a stable platform that meets both the client's leverage requirement as well as Morgan Stanley's Value at Risk and market stress test thresholds. The margin requirement is therefore a function of the liquidity, volatility and overall diversification of the underlying portfolio, as well as the long/short ratio and/or the amount of hedging through the use of futures and other derivative products.

Other strategies will be subject to specific margin treatment. For example, the haircut on both the target and the acquirer in merger arbitrage positions is based on specific measures such as the nature of each deal (cash/stock) and diversification. Similarly, the leverage provided to convertible arbitrage portfolios is driven by the overall portfolio diversification as reflected in Morgan Stanley's stress test (that includes a bankruptcy test on the biggest credit exposure).