Prime Brokerage Trends
Prime Brokerage Trends Article | TAAAPs
About 7 weeks ago I wrote up a small article for the TAAAPs newsletter. To read the full newsletter please click here. Please see below for the full article that I wrote for TAAAps:
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 of many investment banks offering prime brokerage services, mergers within
the industry, and widespread failures and redemption notices of hedge funds themselves.
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.
Multi-prime brokerage relationships had been used in the past by $5B+ hedge funds whose large institutional clients demanded the practice as a risk management technique. In the past this was almost thought of as 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 its own investment notes. In 2008 everything changed, Lehman failed and many investment banks 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 multiprime brokerage relationships for funds with over $500M in assets or even lower. Some funds as small as $5M are choosing to work with more than one prime brokerage firm from the very start to reduce their exposure to individual firm risk. A few firms have reported shutting down due to assets being locked up within Lehman Brothers when they collapsed earlier this year.
Anyone offering capital introduction services lately has faced the increased challenges of investors sitting on cash, a poor market and overall industry performance, along with increasingly frequent reports of hedge fund fraud. Prime brokerage firms are not as
heavily affected by this as would most independent hedge fund marketers, which are often referred to as third party marketers. A mitigating factor being that prime brokers often take on and attempt to service more clients. 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 plan and marketing plan startup tools, and holding workshops and networking events to help hedge fund managers connect with additional business partners and investors.
Richard Wilson is a relationship manager at Saratoga Prime Services and the author of both PrimeBrokerageGuide.com and HedgeFundBlogger.com.