European asset managers are calling for greater restrictions and the introduction of global standards on pre-hedging as they raise concerns over adverse pricing and a lack of disclosure, a new study published by Acuiti has found.

The research reveals widespread concerns about pre-hedging, the process in which a dealer or liquidity provider hedges a client transaction before it has been awarded. These concerns include transparency, conflicts of interest and market fairness, with strong calls for enhanced regulation and industry standards governing pre-hedging.

Pre-Hedging in Focus: How European Asset Managers View Dealer Practices and Market Impact, commissioned by Susquehanna, is based on survey and interviews with senior executives at the top asset management firms across Europe.

It highlights that while pre-hedging is widely known as a risk management tool, the buy-side is increasingly uneasy about the practice and how it is conducted.

Key findings include:

• 92% of respondents said that pre-hedging has the potential to move the price away from their trade and provide a disadvantageous price
• Over 80% of respondents believe dealers should only hedge their positions after the trade has been awarded
• Only 7% of respondents said that pre-hedging should remain largely unrestricted
• Just 4% of respondents said they always know when a dealer is pre-hedging their trades
• Almost half of respondents have observed suspected pre-hedging activity, often leading to increased volatility and worse pricing
• Nearly 80% of asset managers surveyed supported more stringent regulation, either through clearer disclosure rules (41%) or outright restrictions in certain cases (37%)
• 59% believe dealers should always disclose pre-hedging on a trade-by-trade basis, and 50% want dealers to obtain prior client consent

“Pre-hedging is a complex and often misunderstood part of market structure. Our research shows that while asset managers accept that dealers need tools to manage risk, they are increasingly concerned about the potential for pre-hedging to disadvantage clients” says Ross Lancaster, head of research at Acuiti.

“In our opinion, pre-hedging is unacceptable and should be banned as it can have a detrimental impact on the price received by the end-investor. We believe the results of this study support our view,” says Emma Lokko, head of market structure (Europe) at Susquehanna.

Currently, regulatory approaches to pre-hedging vary significantly by region and asset class. While some jurisdictions address the practice indirectly through market abuse and best execution rules, there are no global standards. This is beginning to change, with bodies such as IOSCO working towards coordinated guidelines — a development that this survey found the larger European asset managers broadly support.

The full whitepaper, Pre-Hedging in Focus: How European Asset Managers View Dealer Practices and Market Impact, is available to download.

Source: Acuiti​​