Top 3 Trends
Top 3 Prime Brokerage Trends
Over the last two years the mainstream media’s and general public’s interest in prime brokerage has rapidly grown. This is due to a number of factors including the struggle and failure many investment banks(Lehman Brothers), mergers within the industry, and widespread failures and redemption notices from hedge funds.
The top three trends affecting the prime brokerage industry right now are multi-prime brokerage relationships, limiting capital introduction services, and prime brokers acting as business partners to hedge fund managers.
In the past, multi-prime brokerage relationships were used mostly by $5B+ hedge funds whose large institutional clients demanded the practice as a risk management technique. This was considered unnecessary as no large investment banks offering prime services had collapsed. It was seen in the same light as a major economic superpower defaulting on their own investment notes. Events in 2008, changed everything, Lehman failed and many investment banks have struggled or sold off their prime brokerage services to other firms. This has lead to widespread migrations between prime brokerage service providers and a trend towards managing multi-prime brokerage relationships for funds with over $500M in assets or even lower. Some firms as small as $5M are choosing to work with more than one prime brokerage firm from the very start as a few firms have reported shutting down due to assets being locked up within Lehman Brothers when they collapsed earlier this year.
Another shift in the industry has been felt within the area of capital introduction services. Anyone offering these services lately has faced increased challenges of investors sitting on cash, poor market and overall industry performance along with increasingly frequent reports of hedge fund fraud. Prime brokerage firms are not effected by this, especially since they often take on and attempt to service more clients than most independent hedge fund marketers which are often referred to as third party marketers would. This had led to more selective capital introduction service offerings by prime brokerage firms and more frequent partnerships between prime brokerage firms and third party marketers in the industry.
The third major trend affecting the prime brokerage business is that more firms in the space are positioning themselves as business partners. This is due to the commoditized nature of the industry and high level of competition for new business. Prime brokerage firms are now publishing white papers, offering business/marketing plan startup tools and holding workshops and networking events to help hedge fund managers connect with additional business partners and investors.