Prime Brokerage Research

Changes to the Prime Brokerage Industry

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FinAlternatives recently completed a great prime brokerage survey/report where they discussed how the highly-publicized hedge fund blowups, the Bear Stearnes collapse and the mortgage crisis have forced the prime brokerage industry to adapt more diligence in hedge funds’ risk exposure and leverage. Institutional investors are increasingly demanding hedge funds to have greater transparency, and hedge funds have passed much of this responsibility to prime brokers. Hedge funds are now employing multiple prime brokers and are more demanding of the services the brokers offer.

Many of the larger hedge funds hoping to minimize exposure are moving fully-paid assets from prime brokers to banks. The larger hedge funds cut third-party risk by financing long positions exclusively through a bank. On the other hand, smaller and mid-size hedge funds are struggling to secure lending and prime brokers. It is especially difficult for small single-strategy hedge funds to find a prime broker, as prime brokers favor the diversified multi-strategy funds.

Recent turbulence in the hedge fund industry has led investors to demand greater transparency of managers. Managers have relayed this responsibility to prime brokers, who have evolved to provide improved risk analytics and add more services to their clients.

- Richard

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