Post on 21-Apr-2015
The Prime Brokerage Book
Believe that if you spend your time helping others get what they need or want that the relationships you build will bring you what you need. In this
spirit I’m offering The Prime Brokerage Book for free to anyone who would like to learn more about this area.
This book is brought to you by:
and
The Prime Brokerage Book
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 2
The # 1 Most Popular Book and Website on Prime Brokerage
The Prime Brokerage Guide is a 100+ page book that on the
prime brokerage industry. It is a free-to-access resource, a
compilation of articles, tips, interviews, book reviews and surveys,
which can also be found on PrimeBrokerageGuide.com.
The Prime Brokerage Guide may be a helpful resource to hedge
fund managers who would like to learn more about prime broker
trends, capital introduction services, counter party risk
management, fees, or working with multiple prime brokers. The
guide may also be helpful to those seeking careers or new clients
from within the prime brokerage industry.
This resource can help you learn both the basics and more
granular details about how the industry operates as a whole. If
you have any prime brokerage questions or would like to
contribute a resource for this guide please email us at
Team@PrimeBrokerageAssociate.org.
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Prime Brokerage Financing & Equity Services
Prime brokerage and counter-party risk management came up
several times within conversations at the Hedge Fund Group
(HFG) event in Chicago. Everyone we spoke with on this topic
was an agreement that the following activities are leading to a
flood of both small hedge fund startups and larger hedge fund
businesses to look for additional prime brokerage
relationships:
Minimum fee charges of $25-30,000+ to remain a client of large prime
brokerage firms
High touch sales pitches which turn into low touch almost non-existent
servicing once the hedge fund is a client of the prime broker
Hedge funds wanting to lower custodian risk by multi-priming with 2-3
prime brokerage firms early on and then 3-5 prime brokers as their fund
expands to over $750M or $1B in assets under management
Capital introduction promises that are never delivered to the manager in
any tangible way Large prime brokerage firms now often cutting out
their clients who cannot product $20,000+ of business a month, they
are too busy for these smaller accounts. This can sometimes lead to
frustrating conversations for hedge fund managers who do not want
to make changes right now and make changes to their trading or
operations due to a switch in prime brokers
If you have seen other reasons why the prime brokerage industry is
evolving please send them in and we can add them to this list. If you are
interested in working with a prime broker, which may offer multi-custodian
solutions, technology and cap intro/marketing assistance please complete
the form at the bottom of this page.
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Challenges of Multiple Prime Brokers
Here is a short excerpt from a recent article by
Hedge Fund Review on multiple prime brokerage
challenges and costs. This is an issue we have
discussed here on HedgeFundBlogger.com and
PrimeBrokerageGuide.com a few times in the past.
The main benefits of multi-priming pointed out within this article include:
Broader securities lending offerings
Competitive financing rates
Additional market research
More access to capital introduction resources
Spreading counterparty risk out over several prime brokers
Here is the article excerpt:
Historically, most hedge funds with assets greater than $1 billion have
operated in a multi-prime environment while smaller funds tend to use a
single prime model in order to simplify their operations. Today funds of all
sizes are moving to the multi-prime model.
This is primarily due to larger funds requiring access to a wide range of
products and services that may not be available within a single prime
brokerage relationship. Introducing competition and expanding the services
available to them has become more important for the long-term success of
small funds as well.
Expanding to a multi-prime organization can result in some additional
operational overhead. However, the benefits seen within this model are
generally regarded as worth the added effort. Having multiple prime
brokerage relationships gives funds access to broader securities lending
offerings, competitive financing rates, additional market research and more
capital introduction services. read more...
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How to Start A Hedge Fund | Advice & Resources
We receive many emails asking how to start a hedge fund,
or what resources we have for those looking to start a new
hedge fund. Over the past year we have worked with over
200 hedge fund startups in various capacities.
Below please find links to some of our hedge fund startup related advice
and tips:
Top 5 Tips for Starting a Hedge Fund (Part 1 of 2)
Top 5 Tips for Starting a Hedge Fund (Part 2 of 2)
Raising Capital With Tenacity
Hedge Fund Marketing Tools
Hedge Fund Seeding
Setup a Hedge Fund
Hedge Fund Formation | Tips on Forming a Hedge Fund
CHA Designation | Benefits to Hedge Fund Startups
Hedge Fund Public Relations
Hedge Fund Seed Capital
Starting a Hedge Fund | A Sample Timeline
How to Start A Hedge Fund
Hedge Fund Backers | A List of Capital Sources for Hedge Funds
Email Newsletter Creation Tool
Hedge Fund Ethics
Seed Capital Sources
Financial Advisor Marketing
Marketing to Institutional Investors
Third Party Marketing
The Hedge Fund Transparency Act
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Just about to jump on a plane so I don't have must time
to write up much of a summary here but two senators
have proposed new legislature, which would force
hedge funds to register with federal securities
regulators. There is a 90% chance that this quickly be
approved:
The Hedge Fund Transparency Act, sponsored by Senators Carl Levin, a
Michigan Democrat, and Charles Grassley, an Iowa Republican, would
require hedge funds to file an annual disclosure form with the U.S.
Securities and Exchange Commission, comply with the agency‘s record-
keeping standards and cooperate with its investigations.
―The problem is that hedge funds have gotten so big and
are so entrenched in U.S. financial markets that their actions can now
significantly impact market prices, damage other market participants and
can
even endanger the U.S. financial system and economy as a whole,‖ Levin
said...
―A major cause of the current crisis is a lack of transparency. The
wizards on Wall Street figured out a million clever ways to avoid the
transparency sought by the securities regulations adopted during the
1930s,‖
said Grassley, who introduced a similar bill in 2007. read more
CA MA CT NY | Directory of Funds
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Over the last 12 months our team has received around
100,000 emails from professionals who have came and
visited our websites. Many of these emails are in regards
to accessing particular resources to help in career or
potential client searches.
Below please find various state-by-state hedge fund manager contact lists
available for under $100 each. These contain contact details for various
funds and may be instantly downloaded.
List of Hedge Funds in Massachusetts
List of Hedge Funds In Connecticut
List of Hedge Funds in New York
List of Hedge Funds in California
List of Hedge Funds in Chicago and State of Illinois
List of Hedge Funds in Dallas, Houston & State of Texas
If you have been directed to this post via email we apologize for the less
than personal response, please email us again if you have any further
questions or concerns.
Prime Brokerage OTC Derivative Arrangements
(http://PrimeBrokerageGuide.com) A recent article by
Alex Akesson noted that some large prime brokerage
shops are now ending any OTC give up
arrangements that their hedge fund clients had
previously put into place. For many hedge funds
these changes are happening right now - and for
many more it will probably occur before the beginning of Q3 of 2009.
Here is the article excerpt mentioned above:
Hedge funds of varying sizes report being given notice by prime brokers
that OTC derivative give up arrangements will end - quickly. Funds ranging
in size from $25M to $2.5B are being told new derivative trades "done
away" will no longer be accepted near the end of the first quarter and that
give up relationships will end completely in April.
‗Give up arrangements‘ are where the executing broker writes trade tickets
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on behalf of both counterparties to the trade – provided hedge funds with
three advantages: easier post-trade operations, cross margining and credit
intermediation.
―Challenged by investors to provide increasing levels of transparency,
independent validation and reporting frequency, funds would also have to
find the operational bandwidth and capability to efficiently manage the
complexities of OTC trade processing involving multiple instruments, high
volumes and multiple counterparties." Hans Hufschmid, CEO of GlobeOp
Financial Services commented, "And the February 28 deadline after which
major dealers will not accept novation consents by email looms.‖ source
Prime Brokerage Services for Small Funds
Just found an article from today within the WSJ which
discusses how many banks and prime brokerage firms are
cutting off services to some of their funds, which they deem
too small (under $200M) or exotic. This is due to necessary
cost cutting, risk management and balance sheet clean up
projects. Many large shops are segmenting clients into 2-5
lists with the smallest or most exotic funds being the first to be cut from
their services such as custody or lending. While those within the industry
know that this has been going on for some time now I don't believe the full
force of it will be felt until Q3 or Q4 of 2009. Here is the WSJ article
excerpt:
Brokerage firms are reducing financing and other services to hundreds of
hedge funds, in a move that could accelerate the shakeout among these
heavy-hitting investors.
Under financial pressure, securities firms are dividing their hedge-fund
clients into lists of those they consider best able to weather the financial
turmoil and those they're less sure of. The result is that more funds may
have to merge, find other financing at higher cost or close. source
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Hedge Fund Service Provider Branding & PR
The value placed upon the brand of service provider
hedge funds and private equity firms are employed has
doubled in the past 9 months. This is due to Lehman
Brothers, Bear Stearns, Madoff and others. In each of
these cases the common thread was the creation of or
fault of un-reliable or unstable service providers. Some hedge funds in
London had 100% of their assets frozen within Lehman‘s custody services,
partnered banks and hedge funds fled Bear Stearns as it sank and
Madoff‘s fund raised half a dozen red flags from in house administration
and self clearing to working with a 2 person auditing firm. The result is an
effort by many to mitigate counter-party risk and conduct research on those
who have been traditionally responsible for providing fund due diligence
services. Fund managers are feeling pressure from hedge fund and private
equity board members and investors to rely on well known and vetted
service providers rather than trying to save 20% in fees by working with a
local or lower cost operation.
Protecting the brand of your own hedge fund or private equity fund is more
important than ever. Rumors of gating clauses being enacted or
redemption requests spiking within a single fund can spread around the
world in less than 3 days. False rumors can cause investors to act
irrationally and began to question the quality of a fund‘s team or operations.
As these two industries develop further many funds will continue to expand
their use of public relations firms and many funds may need to have public
relations plans in place to counter false rumors and be ready to act; this
could be just as important to have in place as a disaster recovery system.
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Hedge Fund Pitch Book
Marketing Materials Tips
Below is a list of my top 10 tips to those
professionals who are looking to create a pitch
book for their hedge fund. My advise to both
$30M and $1M hedge funds is that you can
never start this process early enough, it is an
iterative constantly evolving project which will
never be complete.
Here are the top 10 tips for creating your hedge fund marketing materials.
Think long-term. Invest in creating a robust institutional quality pitch book
the first time around and complete 5 drafts of it internally before showing
it to a single investor.
Stress your team, investment process and risk management controls and
how they all interact inside the operations of your hedge fund.
Make your competitive advantage clear and do not rely upon canned
phrases such as ―positive returns within bull or bear markets‖ anyone
who reviews hedge fund materials for a living see these by the hour.
Your advantage must be unique.
Stress the importance and individual functions of your team, your
experiences and pedigree. This should be the foundation upon which
everything else is built.
Do not send any pitch book or marketing material out before speaking
with a qualified compliance or legal counsel on your team.
Create a one page marketing sheet, full 13-20+ page PowerPoint
presentation and one page newsletter which would be released monthly
providing your view of the markets within your niche area of expertise.
Work with high caliber service providers so that you don‘t bring extra
skepticism upon a relatively new fund, which may already be scrutinized
by potential investors and advisors.
Use your whole team and prime brokerage business partners and other
service providers to improve your marketing materials. Professionals
who work in prime brokerage or administration see many types of
marketing materials and can help provide valuable feedback at no
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additional cost to your fund.
Do not create a PowerPoint presentation that is longer than 30 pages.
There are some institutional money managers who run 3 similar funds
and will sometimes cover each of these within a single presentation, but
this is the exception. 95% of the people who you will send the
PowerPoint presentation to will not ready more than 15 pages of the
material unless you are walking them through it over the phone or in
person.
Purchase the rights to graphics, choose a unique, simple and
professional layout for the presentation and use the new Windows Vista
diagramming tools to create institutional quality presentation. Coming
into a meeting with a word document or 25 pages of bullet points is not
very effective. It is hard enough to catch an investors‘ attention and bring
them to the table to discuss your fund, you don‘t want to lose them due
to the aesthetics of your PowerPoint.
Blood On The Hedge Fund Streets
While the economic conditions have shut down
many funds, exposed fraudulent activity, and also
created a unique set of opportunities for a small
subset of traders and portfolio managers within the
industry. The hedge fund and private equity
industries are as entrepreneurial as ever.
In Q1 2009 there are hundreds of New York and London based hedge
funds being started to take advantage of high volatility, historically low
asset prices, and relatively cheap talent hungry for a fresh start. Many of
these young hedge funds and private equity groups are not yet on the radar
of institutional databases or mainstream media outlets but by Q3 and Q4 of
2009 they will be, and we will be able to see how many funds have been
started around the world. I believe these figures will be high and will spur
even more startup activity as others move to seize the current market
opportunities.
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Prime Brokerage Trends Article | TAAA
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
multi-prime 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
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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.
Independent Fund Administration
Tom Zita from Globe Op sent me an interesting
article by Advanced Trading on independent fund
administration and how fund of funds and investors
will be requiring this more in 2009 than ever before.
Here are a few great quotes from this article:
"The failure of the funds of funds that invested with Madoff was simply that
they didn't do the due diligence that they ought to have done," says Rich
Koppel, managing director at youDevise Ltd., a supplier of hedge fund
technology that has offices in London, New York and Hong Kong...
"From where I sit in the fund-of-funds side, I've looked at [Madoff's] return
stream several times and rejected it [based] on my gut," Vale adds. "It's
checks and balances -- you have to check all the boxes." ...
Infinity Capital's Vale speculates that the feeder funds "depended on the
numbers that [Madoff's] underlying funds provided." Even though some of
the underlying funds had third-party fund administrators, even the third-
party administrators appear to have accepted Madoff's numbers. "Madoff
was providing those numbers. Nobody dug a little bit deeper to see that
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those numbers were just coming from in-house," Vale claims.
"There was no third-party firm at all looking at the numbers to verify even if
they were real or correct," Vale continues. "That's a deal killer for us."...
"The major red flags were to do with predominantly back-office issues,"
adds James Freeman, senior relationship manager at Key Asset
Management, a London-based fund of funds manager with $2 billion in
assets invested in 90 underlying hedge funds. "A bad investment process
can lose you lots of money, but a [bad] back-office business structure can
lose you all of it," he warns. ..
"All the major classic frauds -- Beacon Hill Asset Management and the
Manhattan Fund -- use that tactic, [in which] the broker is the sole source of
the quote [aka, net asset value] and it's not being reconciled by a third-
party administrator, to send out false information because there is no
record of it and you have no independent validation if the information is
correct," says Freeman. read the full article
Prime Broker Market Share Changes
Below is a short article on how the market share
between prime brokers is changing. Some banks are
gaining over $1B a quarter in new assets while others
are losing market share to those banks which appear
to be less risky to hedge fund managers who are
trying to lower counter-party risk. Here is the article excerpt:
The collapse of Lehman Brothers last September was the flashpoint of a
year that saw the prime brokerage world - along with that of its hedge fund
clients - transformed by the ongoing credit crisis and grisly economic
backdrop. But for those funds and brokers that come through the
turbulence intact, the new landscape offers a broad range of opportunities
for the coming years, according to Nick Roe, the London-based head of
prime finance at Citi.
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While the hedge fund assets that were locked up in London after Lehman
Brothers International (Europe) went into administration garnered headlines
for a while, Roe argues that just as important was the spotlight turned on
rehypothecation - the use by prime brokers of hedge fund assets as
collateral for the borrowing they need to provide funding to those clients.
'I believe the regulations regarding rehypothecation will change, with prime
brokers forced into much more transparency,' he says. 'But it won't go
away, because most hedge funds couldn't cope with the changed
economic conditions if prime brokers weren't able to make use of some of
their assets to deliver the required levels of funding.' source
Hedge Fund Industry Ethics
A few weeks ago I posted a note hoping to create a
conversation around hedge fund industry ethics and best
practices. Just this morning I found an interesting article on
hedge fund ethics, again it appears that the most challenging
part of setting any code of ethics for the industry is that
hedge fund manager are so diverse, their operations,
investments, and even scheduled life-spans are often drastically different
from one fund to the next. As hedge funds are forced to innovate to
produce returns in 2009 while also securing capital for distressed assets I
believe this diversity will only increase over the next few years. Here is the
article on hedge fund ethics:
Hedge funds took a battering 2008 - and as they have been battered by the
storm two questions of "right" and "wrong" have been coming up that show
that there are ethical codes at work here, but no agreement on what the
"right" answer is.
And here's where the "ethical" questions come up:
If your fund is down and you know it is going to take years to recoup the
losses and get paid at 20% of profits again do you:
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a) stay with the fund until you have recouped the losses and made your
investors whole - working for "psychic income" as Kenneth Griffin of Citadel
fame told the New York Times or
b) leave - retire, switch to a new fund, start a few fund - basically start
again? If you had many years of excellent performance before this one
terrible year you may well be able to raise another fund.
In the first case there's a moral high ground to climbing back out and
keeping your commitments to your investors, but maybe the second case
makes sense if you can't climb back out from that fund. Maybe you can't
keep your key players or your strategy no longer works and your investors
are better off with you closing the fund and returning their money.
The second question is whether to allow investors to take money out of the
hedge fund. Again hedge funds are not acting consistently. One of your
investors wants to pull his money out - do you:
a) allow him to knowing that doing so could hurt the remaining investors
that are staying in because you'll be forced to selling into a falling market?
Much of the volatility in November and December was redemption selling
as hedge funds were force to liquidate equities and debt so investors could
withdraw funds. Or do you
b) tell investors they can't take their money out and you are going to hold it
until it is a more stable time to sell?
Again this is a current raging debate in the hedge fund world that takes on
the ethical language of right and wrong. I know I'd want to be able to get
my money out if I'd lost faith in a fund! source
Prime Brokerage Services Q&A
Question: What Services do Prime Brokerage Firms
Provide?
Answer: I recently found a detailed answer to this
question within the Preqin Global Hedge Fund Investor book. Here it is:
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Prime brokers provide trading and financing services to hedge funds. Prime
brokerage is the common name for the package of services offered by
investment banks and securities firms to hedge fund and other investors
allowing them to borrow securities and cash to be able to invest on a
leveraged basis and achieve an absolute return.
The prime broker is able to provide a centralized securities clearing facility
for the hedge fund and then benefits by earning fees on financing the
client‘s long and short cash and security positions and by charging fees for
clearing and other services. It also earns money by hypothecating the
portfolios of the hedge funds it services.
Capital Introduction Q & A
Question: What are capital introductions services? Should our
firm be using them? We are based in Miami, any help would
be appreciated.
Answer: I recently found a detailed answer to this question
within the Preqin Global Hedge Fund Investor book:
Capital introduction is the service whereby the prime broker
attempts to introduce its hedge fund clients to qualified hedge fund
investors who have an interest in exploring new opportunities to make
hedge fund investments. Some prime brokers will offer a physical capital
introduction service arranging meetings and events where the managers
are able to meet investors. Others will partner with a third party marketer or
offer a particular marketing plan to hedge fund managers who have not
attempted to raise assets before. This service is popular with hedge fund
managers and can lead to new business for the prime brokerage firm.
My background is in capital raising and I am now associated with a prime
brokerage firm which offers capital introduction services. If you are looking
for prime brokerage or capital introduction services please get in touch with
our team and we will help as we can.
Where are Prime Brokers Located?
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Question: I am looking to work with a local prime
brokerage firm, do you know where most of them are
located?
Answer: Within a recent survey of prime brokerage firms I
found some interesting statistics on prime brokerage firms.
Here are the numbers:
74% of firms were based within the United States
13% in London
3% in Canada
2% in France
2% in Poland
2% in India
2% in Russia
2% in Germany
I found the Russia, Germany and France numbers to be surprising. I was
also surprised that Asian countries didn‘t break 2-4% of this list. Perhaps
this has to do with regulations and fund structures and terms used within
that area of the world. These statistics were taken from the recently
published 2009 Preqin Global Hedge Fund Investor Book.
A Guide to Overcoming the Operational Challenge of Multi-Prime Brokerage
Introduction
The ongoing market turmoil, the bankruptcy of Lehman Brothers
leaving $65 Billion in frozen hedge funds assets, and the doubts
surrounding the leading primes have accelerated the demise of the
already faltering single prime brokerage model. Single primed funds
that had been slow to embrace the new multi-prime world are now highly
motivated to reduce counter-party risk by establishing multiple custodial
relationships. This guide explores the different options available to a single
primed fund that is making the leap to multi-prime. It begins by describing
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the nature of the operational challenge, then weighs the pros and cons of
today's multi-prime solutions, and concludes with a recommendation.
The Operational Challenge of Multi-Prime
Once a fund accepts the necessity of multiple prime relationships there
quickly follows the realization that there is a cost associated with this new
model. This cost, which is in the form of operational complexity and the
need to acquire middle and back-office functionality, had been borne by the
prime in the single prime model. At the very core of this complexity is the
requirement to collect and aggregate the disparate cash, position, and
transaction information, across multiple primes. Once the data are captured
and reconciled the fund must then be able to present the data in real-time
and historical, views and reports, which allows the fund to understand key
measures such as P&L, performance, exposures and risk. Additionally,
since the data are so critical to so many constituencies it must be flexible
enough to meet the specific needs of everyone across the firm. Likely users
include the trader, the portfolio manager, the compliance officer, the COO,
the CFO, Operations and indeed ultimately external investors.
Further complicating matters is the certainty that as the expanded search
for alpha continues to drive funds far beyond their domestic long/short
equity roots, the middle and back-office must now be capable of handling
multi-currency, global securities, and derivatives, all across multiple time-
zones. Much consideration must be given to how a firm deals with this
operational challenge since many of the available solutions involve a fund
going in a direction that risks distracting them from their central purpose of
alpha generation.
At the heart of all multi-prime solutions is the portfolio management system
(PMS). Before we explore the attributes of the multi-prime PMS let's briefly
look at the three key building blocks necessary to ensure that the PMS
displays relevant, accurate and timely data.
The 3 Building Blocks of a Multi-Prime Solution
1 - Allocation - An effective allocation process ensures that the PMS has
the ability to 'slice and dice' views and reports in a manner that is
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sufficiently flexible to meet the information needs of the particular end user.
At the highest level it involves a process of identifying and categorizing
trades down to the tax-lot level. Once these positions have been correctly
categorized it becomes possible for the PMS to generate reports based on
these categories. More sophisticated allocation methods allow for a layered
approach so that reporting can be multi-leveled. An example would be a
CFO who would like to understand the P&L attributed to a particular
portfolio manager, who is associated with a specific strategy within a
particular fund. The data can be quickly viewed assuming that the
allocation has been correctly completed and that the PMS is capable of this
multi-tiered reporting. Allocation is usually handled by an Order
Management System (OMS). It is vital that the OMS and PMS share the
same allocation methodology or the reporting flexibility of the PMS will be
compromised.
- Data Capture - The subject of data capture becomes particularly
important in a multi-prime environment. The data that the PMS displays will
only be as good as the quality and the timeliness of the information flow
between the relevant counter-parties. It is imperative that the solution can
send and receive the file formats demanded by primes, fund administrators,
executing brokers and market data vendors. Formats such as flat-file, XML,
SWIFT and increasingly FIX are prerequisites for any modern solution. To
further complicate the process, a robust security master must be at the
core of the data capture process. The security master ensures that data
across multiple primes is normalized so as to allow seamless integration. In
addition, a security master that includes independent corporate action
verification will serve as a check and balance to the primes‘ corporate
action reporting.
-Reconciliation (and Exception Processing) - The reconciliation process
ensures the accuracy of the firm's data and involves the fund comparing
what it understands to be its trading activity with the records of other
counter-parties, such as the primes or the fund administrator. Ideally the
process is automated and ensures that differences or exceptions between
the various parties are discovered and corrected as soon as possible. Once
these errors are discovered the PMS should have the ability to unwind the
error in a one-step process.
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The Portfolio Management System in a Multi-Prime World
The PMS has always been the most important hedge fund application
because it is responsible for generating its books and records. This query
able repository of a fund's activity is used as a tool to understand how
successful a fund's alpha generation efforts have been in terms of
performance and risk, and is critical in a multi-prime environment.
It is no surprise that the evolution of the PMS has mirrored (and in many
cases lagged) the evolution of the hedge fund industry. The first hedge
fund PMSs that emerged 20 years ago were essentially re-purposed
vendor solutions from the long-only asset management industry. As funds
push beyond domestic long/short equity strategies these same vendors
have responded, with varying levels of success, by grafting on the
functionality required to support multi-currency, multi-market and multi-
asset class.
Arguably, the biggest demand placed on the PMS by this new complex
multi-prime world, and the demand that legacy systems most struggle with,
is the requirement for true real-time views of data. Funds today require a
real-time understanding of their strategies' performance and risk. This is
particularly true in light of today's market volatility. Alpha has become
increasingly fleeting in nature and funds now must be able to respond
instantly to changing market conditions. Many legacy systems struggle with
this real-time requirement because their architecture pre-dates the
widespread adoption of the FIX protocol. To understand this we only need
to look at how FIX has dramatically increased the flow of trading
information into and out of the front office. This urgency of information flow
is now making its way to the middle and back-office. Legacy PMSs that
were built in a "T+1" world cannot reflect the real-time effect of trade
execution on performance and risk because they cannot accept FIX
messages. Only a PMS built around a FIX engine can offer data that is
updated both tick-by-tick and execution-by-execution.
(For a complete depiction of the typical workflow of a real-time multi-prime
solution please see Figure 1 on Page 6)
Today's Multi-Prime Solutions
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Various industry players have sought to offer a solution to the operational
burden of multi-prime. In choosing one of these solutions, funds typically
face a tough trade-off, which at its most basic level involves a choice
between cost and control. Hedge funds that do not have the financial and
human resources, and are willing to live with less control typically choose a
less costly outsourced solution. Funds that have more resources and
demand complete control of their data take the time and expense to build-
out an onsite system. Let's look at the four most popular solutions available
today.
Prime Broker (Outsourced) - "Hearsay Reporting" - Hearsay reporting is
when one prime (usually the original prime) agrees to accept and
aggregate the trading files from other primes on to their reporting platform.
The advantage to this approach, from the hedge fund's perspective, is that
the original prime shoulders all the operational complexity of going multi-
prime. Not much changes for the hedge fund. They continue to receive
their familiar reports but now including an aggregated view of all their
relationships. There are, however, a number of significant drawbacks to
this approach. First, not many primes are willing to play the role of "the
prime of primes". Primes that offer this service will weigh up whether
retaining a now smaller portion of a fund's business is worth taking on the
cost of the very manual task of hearsay reporting. Anecdotal evidence
suggests that the top tier primes are not willing to offer this service unless a
fund has at least $1 Billion in assets. Additionally, as the fund adds more
and more primes the original prime will find it less compelling to offer the
service. Second, hearsay is a very manual process and is only as good as
the data received. Factor in the possible resentment of the prime offering
the service it is not surprising if accuracy suffers. Third, hearsay does not
sufficiently reduce a firm's dependence on a single prime. Any problems
associated with the prime offering the hearsay reporting will mean that the
fund will have to scramble to replace their reporting infrastructure. Finally,
this solution only goes part of the way to solving the reporting problem. This
is because most hearsay solutions rely on legacy PMSs that are based on
a T+1 process and therefore cannot offer a real-time understanding of P&L
and Risk.
Mini-Prime Broker - A subcategory of the Prime Brokerage industry is a
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group known as the Mini-Primes. They typically use the clearing services of
larger institutions and traditionally served the funds that the bulge-bracket
primes deemed to be too small or risky. Their value proposition has been
around better service at lower cost for the little guy. The turmoil
surrounding the leading primes has meant a mass exodus of many smaller
funds towards these mini-primes. Some of these mini-primes offer relatively
robust hearsay reporting. They, however, suffer from many of the
drawbacks of their larger brethren.
(Tri-Party Arrangement - Another variant of the prime model is a hybrid
between a custodial bank and a prime brokerage. This involves a fund
maintaining its long positions at custodial banks while using a prime or
primes for stock loan and leverage. It is mentioned here because this
model is becoming an increasingly popular way for funds to diversify their
counterparty risk.)
Fund Administrator (Outsourced) - "Middle and Back Office" - The fund
admin would appear to be the obvious candidate to provide a multi-prime
aggregation service. After all, traditionally the admin is responsible for
aggregating all of a fund‘s activities to produce monthly financial
statements and NAV calculations. Indeed, many fund admins have moved
in the direction of offering outsourced middle and back office services. To
date, however, these offerings have not been met with great enthusiasm
from the hedge fund community. The typical complaint is that the reporting
provided by the admin is just not flexible or timely enough for many hedge
funds. The reason for this is that the vast majority of admins rely on the
legacy portfolio management systems mentioned above and therefore
struggle with flexibility and in particular the ability to offer true-real time P&L
and risk. Finally, and a not to be underestimated factor, is that there exists
a cultural mismatch between the accounting mindset of the fund admin and
the trading mindset of many of the hedge funds they seek to service.
Microsoft Excel (Onsite) – Some firms attempt to overcome the operational
complexity of multi-prime by using Excel. This is particularly true for firms
that relied heavily on Excel to augment the reporting capabilities offered by
their original single prime. It is true that Excel is a very flexible tool but there
are many drawbacks to this approach. One, quite simply, the days of an
investor willing to write a $50 million check to a fund that has no formalized
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infrastructure are long since gone. Investors now spend almost as much
time doing operational due diligence as they do research into a firm‘s risk
and return profile. Two, Excel is not built to handle real-time decision-
making. Three, funds that delay implementing a viable long term solution
will find that Excel becomes engrained in their workflow and that over time
more and more internal resources will be expended just to maintain this
sub-optimal solution.
Legacy (Onsite) - For ultimate control of their multi-prime data a fund
typically feels that their only option is to acquire an onsite PMS, OMS and
increasingly an execution management system (EMS). This comes at a
considerable cost and usually involves hiring a team of technologists to
implement, integrate and maintain these disparate legacy systems. With all
this a fund may still find that the data that they demand are still elusive and
that a considerable amount of time has been wasted in building a
competency in technology when the firm‘s primary focus should have been
alpha generation.
A New Approach - Nirvana Solutions
Nirvana Solutions‘ purpose built approach for hedge funds dispenses with
the usual trade-off between cost and control, by combining the best
attributes of the outsourced and onsite models. It involves a single
integrated solution that includes a real-time portfolio management system
built around a trading engine, all made available through the Software as a
Service (SaaS) deployment model. It places the FIX enabled portfolio
management system at the very heart of all of a hedge fund's activities.
This single real-time database architecture ensures that everyone in the
front, middle and back office shares access to the same real-time and
historical information displayed in a form specific to their role. Furthermore
the SaaS model ensures that a firm‘s focus remains on alpha generation
and not on IT support.
Conclusion
The credit crisis has brought home to the hedge fund community the risks
associated with the captive single prime broker model. As funds embrace
the world of multi-prime they are discovering that the accompanying
operational burden must somehow be addressed. There are a number of
competing solutions available to this problem, funds however, must realize
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that the capabilities of these solutions vary greatly, particularly in terms of
their ability to offer true real-time views of P&L and Risk, and in the amount
of IT support required. Both of these factors are now critical in this new era
of increased volatility and depressed returns.
Hedge Fund Managers | Manager Profiles & Notes
Below is a tool developed by HedgeFundBlogger.com, which provides
profiles, news and trend notes on hundreds of hedge fund managers.
Hedge Fund Manager Tracker Profiles:
Abax Global Capital
Absolute Capital
Management | Jonathan
Treacher
Acorn Capital Group
AguasClaras Investimentos
Alternatives Derivatives &
Investments (ADI)
Analytix Capital
Anchor Point Capital LLC |
Albert Hsu Case
Andor Capital Management &
Daniel Benton
Angelo Gordon
Appaloosa Management
Aquiline Capital Partners
Arcanum Capital
Management
Artradis Fund Management
LP
Asset Management Finance
Corp
Atticus Capital
Autonomy Capital Research,
LLP
Avenue Capital Group
Babylon Fund LP | Hedge
Fund Notes
Balyasny Asset Management
LP
Barington Capital Group LP |
Hedge Fund Notes
Bessent Capital
BlueCrest Capital
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Blue Mountain Capital
Managment,LP
BlueBay Asset Management
Bonanza Master Fund LP |
Hedge Fund Notes
Boussard & Gavaudan
Bramdean Asset
Management
Brevan Howard
Bridgewater Capital
Brotman Capital Management
Hedge Fund
Brummer & Partners, LP
Cambridge Place Investment
Management
Carlson Capital Management
Partners LP | Hedge
Fund Notes
Centaurus Capital
Cerberus Capital
Management LP
CF Partners | Carbon Hedge
Fund
Chenavari Credit Partners LP
Cheyne Capital
Children's Investment Fund
Management TCI
Citadel Investment Group
LLC
Clarium Capital Management
| Peter Thiel
Clinton Capital Management
LP | Hedge Fund Notes
Connexion Capital
Creditor Liquidity Solutions
LP
CQS Capital
Dalton Strategic Partnership
Davidson Kempner Capital
Deephaven Capital
Management, LLC
DE Shaw Group
Diapason Commodities
Management SA |
Commodity Management
Drake Capital Management
LLC
Drury Capital CTA Fund
Durrant Capital Management,
LP
Eclectica Asset Management
Ellington Management
Epic Capital Management LP
Eurasia Capital Management
ESL Investments | Edward
Lampert
Farallon Capital Management
Partners LP
Financial Risk Management
(FRM) Investment
Management
First State Investments |
Media Works
Fortelus Capital Management
Fortis Investments Hedge
Fund
Fortress Investment Group
LLC
Four Elements Capital
Management
Four Elements Capital
Management, LP
Goldman Sachs Hedge Fund
Goldman Sachs Hedge Fund
Launch
Gottex Fund Management
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Greylock Capital
Management
Halcyon Asset Management
Harbinger Capital Partners
Hedge Fund
Headline Investment
Management
Hedge Fund BullDog Fund
Sues SEC
Henderson Group PLC
Highbridge Capital
Management LLC
Highland Capital
Management
Jabre Capital Partners SA |
Philippe Jabre
Jana Partners | Hedge Fund
Notes
JO Hambro Capital
Management Ltd.
Juridica Investments
Kenmar Group
K2 Advisors
Lansdowne Partners | Paul
Ruddock
Lasair Capital LP
Lawrence Asset Management
LP
L & G Investment
Management
Lucas Capital Management
Man Investments Group
Martin Asset Management
Maverick Capital LP
MedCap Management and
Research | Charles
Toney
Metropolitan Capital Advisors
Millennium Partners
Mitsui & Co.
Moore Capital Management,
LP
New Star Asset Management
OakRun Capital LLC
Och Ziff Capital Management
Group
Olympia Capital Management
Oracle Evolution Oracle
Services | Spiro
Germenis
Ospraie Management LLC
Oxford Funding Corporation
Palatine Asset Management
Paskewitz Asset
Management
Paulson Invesment Company
Pequot Capital Management
Hedge Fund
Perry Capital
Pershing Square Capital
Management
Pharos Fund
Pirate Capital
Platinum Asset Management
Platinum Grove Asset
Management, LP
Powe Capital Management
LP | Rory Powe
Priapus Investment Fund LLC
Psigma Investment
Management
Pure Capital LP
Quadrangle Group LLC
R3 Capital Partners LP
RAB Capital Plc
Rady Asset Management
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Ramius Capital Group LLC
Renaissance Technologies
Ritchie Capital
RMB Asset Management
International | Tom Joy
SAC Capital Advisors, LP
SageCrest LLC
Sageview Capital LLC
Sandell Asset Management
Corporation
Salida Capital | Hedge Fund
Notes
Satellite Asset Management
Sciens Capital Management
LP
Sellers Capital
Sloan Robinson
Sparx Group Co. Ltd
SRM Global
Steelhead Partners LP
Sugarloaf Rock Capital
System Absolute Return
(SAR)
T2 Capital Partners
Tai Tam Capital
Tantallon Capital
Temujin Global Asset
Management
Tenaska Capital Management
LP | Hedge Fund Notes
Thames River Capital
The Blackstone Group | Kailix
Advisors
The NIR Group LLC |
Alternative Investments
Hedge Fund Notes
The Spanish River Group
Threadneedle Asset
Management | Hedge
Fund Notes
Tontine Associates
TPG-Axon Capital
Trafelet & Co.
Traxis Partners LP
Tremblant Capital Group |
Bret Barakett
Tudor Capital
Vallea Capital
Veritas Asset Management
Viresco International Capital
Management
Viking Global Investors
Vision Capital
York Capital
Fund of Hedge Fund Tracker Profiles Eucalyptus Investment
Funds
Prime Brokerage Business | Wikipedia
Quick Link: Hedge Fund Prime Brokers
Prime brokerage is the generic name for a bundled
package of services offered by investment banks and
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securities firms to hedge funds and other professional investors
needing the ability to borrow securities and cash to be able to invest
on a leveraged basis and achieve an absolute return. The business
advantage to a hedge fund of using a Prime Broker is that the Prime
Broker provides a centralized securities clearing facility for the hedge
fund, and the hedge fund's collateral requirements are netted across
all deals handled by the Prime Broker. The Prime Broker benefits by
earning fees ("spreads") on financing the client's long and short cash
and security positions, and by charging, in some cases, fees for
clearing and/or other services. It also earns money by hypothecating
the portfolios of the hedge funds it services and charging a fee to
those borrowing securities and other investments.
The following services are typically bundled into the Prime Brokerage
package:
Global custody (including clearing, custody, and asset servicing)
Securities lending
Financing (to facilitate leverage of client assets)
Customized Technology (provide hedge fund managers with
portfolio reporting needed to effectively manage money)
Operational Support (prime brokers act as a hedge fund's primary
operations contact with all other broker dealers)
In addition, certain prime brokers provide additional "value-added"
services, which may include some or all of the following:
Capital Introduction - A process whereby the prime broker
attempts to introduce its hedge fund clients to qualified hedge fund
investors who have an interest in exploring new opportunities to
make hedge fund investments.
Office Space Leasing and Servicing - Certain prime brokers
lease commercial real estate, and then sublease blocks of space
to hedge fund tenants. These prime brokers typically provide a
suite of on-site services for clients who utilize their space.
Risk Management Advisory Services - The provision of risk
analytic technology, sometimes supplemented by consulting by
senior risk professionals.
Consulting Services - A range of consulting / advisory services,
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typically provided to "start-up" hedge funds, and focused on issues
associated with regulatory establishment requirements in the
jurisdiction where the hedge fund manager will be resident, as well
as in the jurisdiction(s) where the fund itself will be domiciled.
History
The basic services offered by a prime broker give a money manager
the ability to trade with multiple brokerage houses while maintaining,
in a centralized master account at their prime broker, all of the hedge
fund‘s cash and securities. Additionally, the prime broker offers stock
loan services, portfolio reporting, consolidated cash management and
other services. Fundamentally, the advent of the Prime Broker freed
the money manager from the more time consuming and expensive
aspects of running a fund. These services worked because they also
allowed the money manager to maintain relationships with multiple
brokerage houses for IPO allocations, research, best execution,
conference access and other products.
The concept and term "prime brokerage" is generally attributed to the
U.S. broker-dealer Furman Selz in the late 1970s. However, the first
hedge fund operation is attributed to Alfred Winslow Jones in 1949. In
the pre-prime brokerage marketplace, portfolio management was a
significant challenge; money managers had to keep track of all of
their own trades, consolidate their positions and calculate their
performance regardless of which brokerage firms executed those
trades or maintained those positions. The concept was immediately
seen to be successful, and was quickly copied by the dominant bulge
bracket brokerage firms such as Morgan Stanley, Bear Stearns,
Merrill Lynch, Lehman Brothers, and Goldman Sachs. At this nascent
stage, hedge funds were much smaller than they are today and were
mostly U.S. domestic long-short equities funds. The first non-U.S.
prime brokerage business was created by Merrill Lynch's London
office in the late 1980s.
Through the 1980s and 1990s, prime brokerage was largely an
equities-based product, although various prime brokers did
supplement their core equities capabilities with basic bond clearing
and custody. In addition, prime brokers supplemented their
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operational function by providing portfolio reporting; initially by
messenger, then by fax and today over the web. Over the years,
prime brokers have expanded their product and service offerings to
include some or all of the full range of fixed income and derivative
products, as well as foreign exchange and futures products.
As hedge funds have proliferated globally through the 1990s and the
current decade, prime brokerage has become an increasingly
competitive field and an important contributor to the overall
profitability of the investment banking business. As of 2006, the most
successful investment banks each report over two billion dollars in
annual revenue directly attributed to their prime brokerage operations
(source: 2006 annual reports of Morgan Stanley and Goldman
Sachs).
Fees
Prime brokers do not charge a fee for the bundled package of
services they provide to hedge funds. Rather, revenues are typically
derived from three sources: spreads on financing (including stock
loan), trading commissions and fees for the settlement of transactions
done away from the prime broker. The financing and lending spreads,
which are charged in basis points on the value of client loans (debit
balances), client deposits (credit balances), client short sales (short
balances), and synthetic financing products such as swaps and CFDs
(Contract for difference), make up the vast majority of prime
brokerage revenue. Therefore, clients who undertake substantial
short-selling or leverage represent more lucrative opportunity than
clients who do relatively less short selling and/or utilize minimal
leverage. Clients whose market activities are principally fixed income
oriented will generally produce less prime brokerage revenue, but
may still present significant economic opportunity in the repo, foreign
exchange (fx), futures, and flow business areas of the investment
bank.
Risks
Prime Brokers facilitate hedge fund leverage, primarily through loans
secured by the long positions of their clients. In this regard, the Prime
Broker is exposed to the risk of loss in the event that the value of
collateral held as security declines below the loan value, and the
client is unable to repay the deficit. In practice, such conditions arise
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only in the case of extraordinary volatility or unexpected correlation
reversions and are exceedingly rare. Other forms of risk inherent in
Prime Brokerage include operational risk and reputational risk.
Large prime brokerage firms today typically monitor the risk within
client portfolios by either Value at Risk (VaR) or "Rules Based" stress
testing. Stress testing entails running a series of what-if scenarios
that identify the potential gains or losses for each position due to
adverse market events.
Examples of stress test scenarios include:
* Flight to Quality
* 1% up or down parallel movement in 10-year treasury yield curve
Retrieved from Wikipedia
Prime Brokerage News
Large Banks Win Business
(PrimeBrokerageGuide.com) Recently hedge
funds have been moving some assets away from
investment banks which specialize in providing a
relatively narrow number of products to broader
diversified banks which are more secure in earn money in hundreds
of different ways. These larger banks often make money by catering
to both institutional and retail clients and are less likely to fail. Some
of these firms to recently benefit have been BNP Paribas, Fidelity,
Credit Suisse, and Deutsche Bank (view our list of prime brokers on
the right hand side of PrimeBrokerageGuide.com).
As counterparty risk management and multi-prime brokerage both
grow in popularity this trend will only increase. The list of top prime
brokers by the end of 2009 could look very different than it did just
this last year. Here is a recent article on this topic:
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Broker-dealers such as Morgan Stanley and Goldman Sachs are
losing out in the battle for hedge funds' dwindling pool of assets, as
funds seek out banks with diverse sources of funding in a major
shake-up of prime broking.
The collapse of investment bank Lehman Brothers (LEHMQ.PK) in
September shocked hedge funds, as those with accounts at Lehman
when it sought bankruptcy protection had those assets frozen and
risked being unable to close trades.
"The Lehman bankruptcy ... led many hedge funds to flee the two
largest prime brokers, Morgan Stanley and Goldman, for the
perceived safety of the universal banks," said Berstein Research
analyst Brad Hintz in a note.
Prime brokers make money by charging hedge funds fees for
providing financing for trading and settlement of trades.
Credit Suisse (CSGN.VX), whose operations include a large wealth
management unit as well as prime broking, saw balances in its prime
brokerage unit grow 50-60 percent last year compared with 2007, a
source familiar with the business said.
Roy Martins, the bank's head of international prime services, said:
"There was a peak in terms of business in September and October.
All the clients we took on had existing relationships and dialogues
with us as they were clients we had been targeting anyway."
Deutsche Bank (DBKGn.DE), backed up by its big retail bank, has
also benefited from an influx of business in its prime brokerage in the
last six months, a source close to the bank said. source
Counterparty Risk Management | Counter Party Risk
It goes without saying that counterparty risk management has
become more important to look at for just about
everyone in the industry. What needs more
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discussion is exactly how to conduct and assess counterparty risks.
Here is an article on this topic:
Risk and Reward: Hedge Funds Changing Views on Counterparty
Relationships, focuses on the heightened importance of effectively
managing counterparty risk and the integral role it plays in partnering
with a prime broker. It also highlights best practices that have been
implemented by other hedge funds to help address and mitigate
counterparty risk. Key findings from the study include:
• Hedge Funds Increase Scrutiny On Managing Counterparty Risk --
Counterparty risk monitoring has become a significant part of overall
business operations. One of the major drivers for heightened
attention to managing counterparty risk are hedge funds' concerns
about the negative impact it could ultimately have on their firms'
operations should one of their key counterparties default on their
obligations. More than 50% of respondents reported monitoring
counterparty risk on a daily basis and nearly 85% consider it an
extremely important or very important business issue. An
overwhelming 96% of respondents also cited managing counterparty
risk as the number one factor in selecting their prime broker
relationships. Concerns about managing counterparty risk two years
ago were not a primary issue for most hedge funds, as 26% of the
respondents considered counterparty risk important and 22% viewed
it as moderately important;
• Counterparty Risk Management Must be Tackled Directly and
Systematically -- Effectively monitoring counterparty risk will continue
to be a critical component of a hedge fund's business operations. The
development of a standardized, well-documented approach to
analyzing counterparty risk remains one of the top priorities for the
hedge fund community. Best practices for proactively managing
counterparty risk include:
* Leveraging innovative services from prime brokers, such as a tri-
party account approach
* Conducting consistent internal portfolio and risk assessments
* Formalizing business processes by outsourcing and installing in-
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house technology solutions such as portfolio management systems
* Implementing third-party independent valuation technology solutions
and service providers supplemented with in-house valuation tools;
and
• Adoption of Technology -- There is no silver bullet for hedge funds
when attempting to actively monitor the balance sheets of important
counterparties despite the growing concerns over counterparty risk
management. Read the full article
Top 3 Technology Trends for Hedge Funds in 2009
Below is a short guest post by Peter Curley of
Nirvana Solutions:
The turmoil that hedge funds have experienced in
the last few months will ultimately have a
significant impact on the technology and the
infrastructure supporting this industry.
The trends we will witness in 2009 will primarily be the result of the
following drivers:
Increased cost consciousness - This will be true for both new
and more established funds.
The new requirements of the next generation of hedge funds -
These funds will be smaller, more opportunistic, and less likely
to focus on any one strategy or asset class.
Market volatility - All indications are that 2009 will continue to
be as volatile as the latter half of 2008.
Three technology trends for 2009:
1 – Outsourcing – Historically hedge funds have resisted efforts to
outsource. Funds preferred to build out their own middle- and back-
office functions citing concerns around flexibility and privacy. Now, for
many funds, the need to aggressively cut costs will trump these
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concerns and force outsourcing. Interestingly, taking a step back we
can see that there has always existed incredible duplication of effort
across the hedge fund eco-system. In many cases hedge funds,
prime brokers, and fund admins, all conduct the same processes
using the same legacy "T+1" portfolio management systems. The
industry can no longer support this duplication. All hedge funds,
except the very largest, will begin to look to third-parties to offload this
operational burden.
2 – Restructuring of the industry's service providers. The biggest
news here will be rise of the mini-primes. The leading primes can no
longer be profitable in this new world of multi-custodial relationships.
With the demise of the captive single prime model we are now seeing
the top-tier primes retreat up-market to focus their efforts on servicing
funds with greater than $1 billion under management. This leaves the
lower-cost-structure mini-primes ideally positioned to fill the void. The
new mini-prime offering is still evolving but will likely offer a complete
multi-prime brokerage service platform that in some cases will also
include hedge fund administration. These all-in-one multi-prime
service platforms will be especially critical to the regeneration of our
industry because they will act as the entry point for 100's of the new
spin-off funds that are expected to form in 2009.
3 – Real-Time systems – In this new world of opportunistic alpha,
hedge fund managers can no longer afford to rely on systems that
offer "T+1" reporting. As noted earlier, legacy technology that can
only offer this type of end-of-day and end-of-month reporting will
become less relevant and ultimately be outsourced to third-parties.
Hedge fund's instead will focus their resources on real-time systems
that can aggregate risk and return across multiple prime relationships
and multiple asset classes. Increasingly we will see the desktop of a
hedge fund trader/portfolio manager feature only 2 types of real-time
FIX based systems: 1/ Those connected to implementing the
investment decision (i.e. execution management systems), and 2/
systems, that once an investment decision has been implemented,
can offer a real-time understanding of risk and return (i.e. real-time
portfolio management systems and risk management systems).
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Article contributed by Peter Curley of Nirvana Solutions. Founded in
2006, Nirvana Solutions is a San Francisco based software company
that provides real-time portfolio management solutions to multi-prime
hedge funds and prime brokers.
Adding a Second Prime Broker
While looking for a client document online I found a
white paper on prime brokerage which discusses the
use of multi prime brokerage firms by a single hedge
fund.
This white paper claims that the benefits of adding a second prime
broker include:
Mitigation of risk: counterparty, financing, liquidity and
operational
An additional source of alpha-generating trade ideas, capital
introductions, etc.
Ensure optimal financing through competitive pricing of margin
lending and stock loan
Gain access to competitive or innovative cross-margining
policies of the competing prime broker
Leverage across the relative strengths of service providers in
synthetic financing, swap trading or market access
Catalyst for reduced dependency on outside service providers,
giving greater direct operational control
This full white paper may be read here.
Bernard Madoff
Not a Hedge Fund | No Prime Brokerage Services
Just came across another post on the Madoff
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fraud case. This article is by Veryan Allen, here is an excerpt:
Bernie Madoff was a stock broker "managing" client accounts. He
was never part of the hedge fund industry. His firm was "regulated"
and fraud is already illegal. He did not charge 2 and 20 and had no
prime broker, proper auditor or independent administrator. Few
professional investors invested directly with so many red flags in
abundance. Due diligence is an alpha source itself. And portfolio
diversification with NUMEROUS strategies and managers is
mandatory. read more...
Prime Brokerage Risk
Prime Brokerage Risk | Risks of Single Priming
Below is a short excerpt from an article I found on
why hedge funds are now working with multiple
prime brokers at one time. I believe this model will
become even more important in 2009 and possibly
become a required checkbox for investments from
many institutional investors or a green light from institutional
consultants.
Why It's Important: With the demise of Bear Stearns in March 2008
and the bankruptcy of Lehman Brothers this past September, hedge
funds that had prime brokerage relationships with these firms were
exposed to significant counterparty risk. Some hedge funds that
primed with Lehman had their assets frozen as part of the European
bankruptcy proceedings against Lehman, driving some to liquidate
securities to meet redemption calls from investors and even forcing
some out of business. "There are people who either had long assets
on deposit and can't get them back or, worse, Lehman borrowed the
assets and lent them out," explains Larry Tabb, founder and CEO of
TABB Group.
Where the Industry Is Now: Most hedge funds with more than $250
million in assets have relationships with two to four primes, which are
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picked for their trading expertise in certain asset classes (e.g., FX or
derivatives) or geographies, such as Europe or Asia. For smaller
hedge funds, however, diversifying can be difficult because the large
prime brokers have minimum-asset requirements and other
constraints to weed out the smaller players. Smaller hedge funds,
with $10 to $15 million in AUM, typically launch with a single prime
broker that may provide trading systems, margin accounts, stock
loans and clearing. source
Prime Brokerage Agreement | Contract Example
While looking for a white paper on prime brokerage I
stumbled upon an example prime brokerage services
contract. If you are conducting due diligence on prime
brokers or about to sign a contract with one it may make
sense to look at this example contract just to get a sense of what to
expect or negotiate.
To view the example prime brokerage agreement please click here.
New Prime Brokerage Model Emerging
The credit crisis and the subject of counter party risk is
proving to be the f final nail in the coffin for the hedge fund
industry's single prime brokerage model. Funds of all sizes
now demand multiple custodial relationships.
The problem the high-cost-structure leading prime brokerage firms
now face is that without the assurance of the captive single prime
model the economics of servicing smaller funds no longer makes
sense. This reality combined with the primes' decreased risk
tolerance means that we are seeing a mass exodus away from the
top-tier primes. Anecdotal evidence suggests that these primes are
now in the process of weeding out clients that manage less than $100
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million or that do not generate annual revenues of at least $250,000.
We are also witnessing primes becoming more selective about what
type of funds they are willing to service. Funds whose strategies
involve less liquid securities and/or high leverage are now finding the
bar set much higher.
This retrenchment by the leading prime brokers raises the obvious
questions - Who will fill the void and offer prime services to the lower
end of the market? Who will provide the financing, stock loan,
technology infrastructure etc. necessary for smaller funds to generate
alpha?
Before we answer this question let‘s take a moment to think about
why this smaller hedge fund segment is so key to the future success
of the industry. It is no secret that size kills alpha. Many successful
funds follow a familiar arc. They gain attention (and funds) by earning
outsized returns, as they grow in size their primary strategy reaches
capacity and they experience a leveling off of returns. If they are not
lucky enough to find another successful strategy, returns will continue
to suffer, capital will begin to flow out and ultimately investment talent
will go in search of new opportunities. This regeneration process is
vital to the health of the industry and for many investors, it is the
promise of catching a smaller fund during this growth phase that
motivates them to invest.
Historically the group charged with picking up the crumbs left by the
leading primes was a group known as the mini-primes. This term is
rapidly becoming obsolete as the mini-primes now find themselves
expanding their offerings to attract the funds that have been
displaced. Two important differences remain: 1 - The mini‘s still use
the clearing services of their larger prime broker brethren, and 2 -
more importantly, their cost-structures evolved in a way that allows
them to offer prime services profitably at this lower end of the market.
Interestingly we are also seeing a number of new entrants to this
expanded segment of the prime brokerage industry. These are for the
most part more traditional brokers who see an opportunity to increase
the stickiness of their execution services, as well to develop new
revenue streams, by building out a prime brokerage offering.
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Only time will tell who will be successful in this greatly altered
landscape of prime brokerage. The winners will be the firms that
understand that the new economics of prime brokerage demand a
new industry infrastructure. This prime infrastructure will rely heavily
on cost-effective technologies that can offer aggregated multi-prime
reporting, as well as real-time views of critical data such as P&L and
Risk, right to the desktop of the hedge fund. This restructuring of the
prime model will ensure the health of the industry by continuing to
offer a relatively low barrier of entry to the all important small hedge
fund segment.
Article contributed by Peter Curley of Nirvana Solutions
Gating Clauses & Lock Up Periods for Investors
Hedge Fund Research's Global Hedge Fund Index was down 3.04
percent in November, after a drop of 9.26 percent in
October (see FIN Alternatives article). That brings the
index down 22.3% YTD through November. Continued
poor performance has increased redemption requests,
causing an increasing number of hedge funds to block
investors from redeeming shares (see NY Times article). The
increased addition of illiquid investments over the years (such as real
estate and private equity) has caused many funds to start considering
a new model that would require longer lock-up times for lower fees.
High-water marks, which would force some under-performing funds to
earn back 25 percent or more before taking profit fees, will cause
additional funds to close, although others insist they will take the high
road and not close until they are profitable again.
As of the end of last week, approximately 100 hedge funds have
placed restrictions on withdraws, in what is becoming a financial
roach motel where investors can check in, but they cannot check out
(see Bloomberg article). The increased use of gates has even spread
to some of the previous stars of the industry, such as Fortress
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Investment Group, Tudor Investment Corp., and D.E. Shaw &
Company (see WSJ article). Furthermore, the problems are even
worse for those funds investing in emerging markets, which continue
to under-perform and are down an additional 1.41% on average in
November (see Bloomberg article).
Finally, even with new gating restrictions, some hedge funds are also
being forced to renegotiate borrowing terms with their prime
brokerage lenders as losses and redemption requests increase (see
Financial Times article). Many prime brokers are also seeing this as
an opportunity to drop clients or renegotiate terms that were originally
in favor of the large hedge funds who previously had bargaining
power. No doubt many large investors with liquidity will be able to
throw their weight around in a similar way as they begin renegotiating
lower fee structures in return for longer lockup periods.
by Davide Enke
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 offering prime
brokerage services including Lehman Brothers,
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 used to be used by $5B+ hedge
funds whose large institutional clients demanded the practice as a
risk management technique. In the past this was almost though of as
unnecessary as no large investment banks offering prime services
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had collapsed. It was seen in the same light as a major economic
superpower defaulting on their own investment notes. This year, in
2008 everything has changed, 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 no 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 plan and marketing
plan startup tools and holding workshops and networking events to
help hedge fund managers connect with additional business partners
an. investors
Prime Broker List
Nowadays this list seems to be changing daily - but here is a
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relatively recent list containing the names of over 190 prime
brokerage firms:
Goldman, Sachs & Co.
Fortis Clearing Americas LLC
Goldman Sachs Execution & Clearing, L.P.
Sanford C. Bernstein & Co. LLC
Morgan Stanley & Co. Incorporated
Interactive Brokers L.L.C.
Jefferies & Company, Inc.
Dundee Securities Corporation
Natixis Bleichroeder, Inc.
RBC Capital Markets Corporation
Ferris, Baker Watts, Inc.
BMO Capital Markets Corporation
Morgan Stanley & Co. Incorporated
Legent Clearing LLC
Prime Dealer Services Corp.
J.P. Morgan Securities Inc.
Prudential Bache Commodities, LLC
Barclays Capital Inc.
LPL Financial Corporation
National Bank Financial Inc.
Barclays Capital Inc.
Deutsche Bank Securities Inc.
Lek Securities Corporation
ITG, Inc.
Wedbush Morgan Securities, Inc.
Prudential Bache Securities, LLC
Penson Financial Services, Inc.
Merrill Lynch Professional Clearing Corp.
MF Global Inc.
Ingalls & Snyder L.L.C.
Banca IMI Securities Corporation
First Clearing, LLC
Neuberger Berman, L.L.C.
Neuberger Berman, L.L.C.
Ridge Clearing & Outsourcing Solutions, Inc.
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Merrill Lynch Pierce Fenner & Smith Inc.
Charles Schwab & Co., Inc.
Nomura Securities International Inc.
Scotia Capital Inc.
RBC Dominion Securities Inc.
Wachovia Securities, LLC
Goldman Sachs Execution & Clearing, L.P.
Gelber Group LLC
BMO Nesbitt Burns, Inc.
American Enterprise Investment Services, Inc.
UBS Financial Services Inc.
National Financial Services LLC
Lek Securities Corporation
BNP Paribas Prime Brokerage, Inc.
Compass Professional Services, LLC
Penson Financial Services, Inc.
RBC Capital Markets Corporation
SMW Trading Company, Inc.
Barclays Capital Inc.
Greenwich Capital Markets, Inc.
Maple Securities U.S.A. Inc.
ING Financial Markets LLC
TradeStation Securities, Inc.
Southwest Securities, Inc.
Albert Fried & Company, LLC
SG Americas Securities, LLC
J.P. Morgan Clearing Corp.
Credit Suisse Securities (USA) LLC
MF Global Inc.
NYFIX Securities Corporation
Merrill Lynch Pierce Fenner & Smith Inc.
Lazard Capital Markets LLC
First Southwest Company
Bank of America Securities, LLC
Piper Jaffray & Co.
Bank of America Securities, LLC
Goldman Sachs Execution & Clearing, L.P.
Electronic Brokerage Systems, LLC.
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optionsXpress, Inc.
Octeg, LLC
J.P. Morgan Clearing Corp.
Credit Suisse Securities (USA) LLC
Terra Nova Financial, LLC
USAA Investment Management Company
Tradition Asiel Securities Inc.
Janney Montgomery Scott L.L.C.
BNP Paribas Securities Corp.
E*TRADE Clearing LLC
Tradelink L.L.C.
Fortis Clearing Americas LLC
CGMI
Citigroup Global Markets Inc.
Stephens Inc.
ABN AMRO Inc.
Automated Trading Desk Financial Services, LLC
Newedge USA, LLC
MF Global Inc.
Archipelago Securities, L.L.C.
CIBC World Markets Corp.
Assent LLC
Pershing LLC
StockCross Financial Services, Inc.
UBS Securities LLC
MF Global Inc.
Newedge USA, LLC
MS Securities Services Inc.
Goldman, Sachs & Co.
Goldman Sachs Execution & Clearing, L.P.
CIBC World Markets Inc.
Vision Financial Markets LLC
Lek Securities Corporation
Penson Financial Services, Inc.
Ziv Investment Company
Merrill Lynch Professional Clearing Corp.
Nasdaq Option Services, LLC
Paloma Securities, L.L.C.
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Interactive Brokers L.L.C.
Merrill Lynch Professional Clearing Corp.
Fortis Clearing Americas LLC
Robert W. Baird & Co. Incorporated
Timber Hill L.L.C.
Merrill Lynch Professional Clearing Corp.
Merrill Lynch Professional Clearing Corp.
Fortis Clearing Americas LLC
Oppenheimer & Co. Inc.
Goldman Sachs Execution & Clearing, L.P.
Deutsche Bank Securities Inc.
Merrill Lynch Professional Clearing Corp.
Barclays Capital Inc.
LiquidPoint, LLC
KDC Merger Arbitrage Fund, LP
Vision Financial Markets LLC
Tradelink L.L.C.
Merrill Lynch Professional Clearing Corp. / Merrill Lynch Futures
Morgan Stanley & Co. Incorporated
Electronic Brokerage Systems, LLC.
Newedge USA, LLC
Merrill Lynch Pierce Fenner & Smith/Broker Dealer Execution
Services
Timber Hill L.L.C.
TD Waterhourse Canada Inc.
UBS Securities LLC
UBS Securities LLC
Interactive Brokers L.L.C.
Bernard L. Madoff Investment Securities LLC
Daiwa Securities America, Inc.
Calyon Securities (USA) Inc.
BNP Paribas Securities Corp.
Newedge USA, LLC
J.P. Morgan Futures Inc.
Merrill Lynch Professional Clearing Corp.
Newedge USA, LLC
Merrill Lynch Professional Clearing Corp.
Lakeshore Securities, L.P.
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Merrill Lynch Pierce Fenner & Smith/Broker Dealer Execution
Services
Goldman Sachs Execution & Clearing, L.P.
Fortis Clearing Americas LLC
Cantor Fitzgerald & Co.
Clearview Correspondent Services, LLC
Scottrade, Inc.
Newedge USA, LLC
Fortis Securities, LLC
Newedge USA, LLC
Raymond James & Associates, Inc.
Mesirow Financial Inc.
Fortis Clearing Americas LLC
Wells Fargo Investments, LLC
Goldman Sachs Execution & Clearing, L.P.
Citigroup Global Markets Inc.
EWT, LLC
H&R Block Financial Advisors, Inc.
Newedge USA, LLC
J.J.B. Hilliard, W.L. Lyons, LLC
William Blair & Company, L.L.C.
Bank of America Securities, LLC
Citadel Trading Group L.L.C.
TD Ameritrade Clearing, Inc.
Morgan, Keegan & Company, Inc.
Merrill Lynch Professional Clearing Corp.
Merrill Lynch Pierce Fenner & Smith/Broker Dealer Execution
Services
Stifel Nicolaus & Company Incorporated
RBC Capital Markets Corporation
Fortis Clearing Americas LLC
HSBC Securities (USA) Inc.
J.P. Morgan Clearing Corp.
Goldman Sachs Execution & Clearing, L.P.
Fortis Clearing Americas LLC OCC/ICE CLEAR Cross Margin
J.P. Morgan Clearing Corp.
Goldman Sachs Execution & Clearing, L.P.
Goldman Sachs Execution & Clearing, L.P.
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Merrill Lynch Professional Clearing Corp.
Chicago Mercantile Exchange
Goldman Sachs Execution & Clearing, L.P.
Bank of America Securities, LLC
Nomura Securities International Inc.
Prime Brokerage Lawsuits
Hedge Fund Lawsuit | Legal Actions
(http://HedgeFundBlogger.com)
Perhaps more dangerous than a wave
of further redemptions in the hedge fund
industry would be a wave of legal
actions. With gates dropping as fast as
assets at many hedge funds investors
may be often left with locked-up assets,
partial withdrawals, steep losses or all
three. The last thing the industry needs is wave of 500+ lawsuits
against hundreds of the top managers in the industry. Most hedge
funds are relatively short on staff as it is and legal battles can keep
managers from trading and raising capital as they should.
Here is a story excerpt about Amaranth and their lawsuit against JP
Morgan and their prime brokerage division:
Remember the days when a hedge fund losing billions was news?
Wise men would knot up their brows and wonder if hedge funds
weren’t too loosely regulated or were creating some kind of systemic
risk. After what we’ve been through in the past year that all seems
like the good old days.
We were reminded of this today when we discovered that Amaranth’s
lawsuit against JP Morgan Chase was still going on. It seems like a
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lifetime ago that the fund run by Nick Maounis imploded amid bad
bets on natural gas. It was the trade that made Brian Hunter,
Amaranth’s lead energy trader, famous. Amaranth lost $6 billion,
collapsed, and sold its assets to JP Morgan and Citadel.
Afterwards, there were recriminations in all directions. Hunter is said
to blame Maounis for not having the available cash to cover the
margin calls. Maounis, for his part, felt he was done in by nefarious
deeds at his prime broker, JP Morgan. Those feelings because a
lawsuit, of course. Read more...
Prime Brokerage Regulation
Are New Regulations Possible?
(http://PrimeBrokerageGuide.com) Below is a article
from All About Alpha regarding pending regulations on
the hedge fund industry and how they may target
prime brokerage firms. From a cost perspective this
may make sense since this is a central point of
potential risk control, but I would be surprised if regulators gone down
this road. I believe regulations will stay at the security level and then
target banks more directly than hedge fund managers.
While the average hedge fund is small and uses a very small amount
of leverage, the average dollar invested in a hedge fund is managed
by a large manager who regularly uses leverage. This state of affairs
is courtesy of the significant amount of concentration in the hedge
fund industry. Most of the world‘s hedge fund assets are managed by
a small group of mega-managers who can shop their business
around to various prime brokers in order to extract the best deal.
A new paper says that in an effort to win this business, prime brokers
have been falling over themselves to offer the most leverage and the
best terms. Ergo, it is the prime brokers, not the hedge funds
themselves that require stricter regulation. (Think: regulating
mortgage brokers, not home-owners…)
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By doing so, regulators can also get the prime brokers to do some of
their bidding when it comes to hedge fund oversight. In other words,
they‘d essentially be informally deputizing the prime brokers.
The paper was written by Michael King of the Bank for International
Settlements and Philipp Maier of the Bank of Canada. (Note to PR
departments of these organizations: Relax, the author says, ―no
responsibility should be attributed to the Bank for International
Settlements or the Bank of Canada―.) Read more...
Saratoga Prime Services Pulse Trading
New York, NY, – Saratoga Prime Services, a
division of Saratoga Capital, LLC, has formed an
alliance with Pulse Trading, Inc. that will give
Saratoga Prime‘s hedge fund clients access to
Pulse‘s dark pool, agency desk and investment
research services in return for Saratoga Prime‘s trading, clearing,
custody, technology and administration facilities.
Saratoga Capital of New York and Pulse Trading of Boston are both
institutional agency brokerage firms. Saratoga Prime specializes in
providing trading-related services to start-up and mid-sized hedge
funds.
Under the joint agreement, Saratoga Prime‘s clients will gain access
to Pulse Trading‘s BlockCross dark pool and the firm‘s institutional
trading desk, together with its Investment Research Consortium of
―best of breed‖ independent securities analysis and commission
management service.
Pulse‘s clients will be able to tap into the brokerage services of
Saratoga Prime, and the clearing and custody services of Goldman
Sachs Execution and Clearing (GSEC), JP Morgan, and Interactive
Brokers.
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―We believe strongly that this reciprocal agreement between
Saratoga Prime and Pulse Trading will be of immense benefit to our
respective clients,‖ commented Saratoga Prime managing partner
Lance Baraker. Added Kevin Carroll, Pulse Trading managing
partner, ―We are very pleased to introduce our leading-edge block
trading and independent research services to Saratoga Prime and its
clients.‖
Baraker also disclosed that Saratoga Prime has expanded its Prime
offering in Dallas, TX, and San Francisco, CA. Todd McFarland,
formerly with Citigroup Lava Trading and AFA (Advanced Financial
Applications) recently joined Pulse‘s San Francisco office and is
responsible for Saratoga‘s West Coast business. New York-based
Saratoga Prime also has a regional office in Boston, MA.
Prime Brokerage Firms Pressuring Managers
Adding to the challenges of trying to improve the
performance of their funds hedge fund managers are now
facing additional pressure from their prime brokers. While
some funds will simply end up paying more or having to
sell off some assets to meet capital requirements others
will simply shop around more...further increasing the rate
at which hedge funds change primary prime brokers or multi-prime
with an assortment of prime brokerage firms at one time. Here is a
short article on this topic:
The survival of a raft of hedge funds is being threatened by fresh
pressure to stump up more collateral for trades made in a range of
illiquid assets. So-called prime brokers, who provide a range of
services to hedge funds, are imposing tougher conditions on their
clients and charging more for financing following the collapse of
Lehman Brothers in mid-September, raising fears that more funds
face collapse.
The more conservative terms mean that a hedge fund would have to
put up extra collateral against financing if markets fall further or sell
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down its holdings. The problem for many hedge funds is that they
have already sold down their more liquid investments and are
grappling with a wave of redemptions from their own investors.
Further collateral requests or higher financing costs may push many
hedge funds over the edge.
One hedge fund manager said: "Funding is being withdrawn by prime
brokers and funding rates have risen sharply in the past week or two.
A tough environment is just getting tougher."
Industry managers are concerned that renewed market turmoil,
leading to weaker performance and client redemptions, could lead to
a vicious circle of selling by hedge funds.
One prime broker said the situation was "on a knife edge". "Everyone
needs to keep their nerve," he added. He also said that prime brokers
were particularly targeting funds that specialize in emerging markets,
both in equities and fixed income, as well as in credit and convertible
bonds - instruments that can -convert into ordinary shares. Source
Switching Prime Brokerage Firms
(http://PrimeBrokerageGuide.com) Lately
you might have noticed an ongoing "battle
of the press releases" in the media by
many prime brokerage firms. These are
typically written so that the firm is
positioned as being safe, technologically
advanced or recently swamped with new
business. This is because these firms
know that many decisions are being made each day right now by
hedge fund managers regarding where to prime.
More funds than ever before are now deciding to multi-prime or
switch prime brokers altogether. Here is a reason excerpt and quote
from someone at UBS speaking to this point:
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Across Wall Street, hundreds of investment funds that relied on
broker-dealers established accounts with commercial banks boasting
stronger credit. The moves have shaken up a business long
dominated by Morgan Stanley, Goldman Sachs Group Inc and Bear
Stearns.
"It's a $2 trillion business and in normal market conditions, people kill
themselves to move 1 percent of market share. In recent weeks,
probably 35 to 40 percent of global market share has been
redistributed," said Alex Ehrlich, global head of prime services at
UBS. "Never has there been a more disruptive period."
Financial Clearing and Execution Services
Clearing is one of the most basic services
provided by a prime broker. Loader (2002) gives
an in-depth analysis for the clearing and
settlement services in the general financial
markets. When a prime broker is hired to carry
out clearing, he performs back office functions on behalf of the hedge
fund client with the broker-dealer that executed the trade.
When the hedge fund begins the trade, the fund provides the
executing broker with the prime broker's name and the relevant
account with the prime broker. Respectively, the executing broker
gives-up the trade (meaning, passing the trade information) to the
prime broker, and the hedge fund reports the allocations of the trade
to the prime broke. The prime broker then performs a post-trade
matching, confirms the trade with both sides if the trade details
match. Otherwise, the prime broker works with the hedge fund and
the executing broker to resolve the differences.
For the hedge fund, the choice of the executing broker includes but is
not limited to the trading desk of the prime broker. (A broker-dealer
must maintain a "Chinese Wall" between the prime brokerage
operation and the trading desk.) If a prime broker acts as principal in
the give-up process, the prime broker allows the hedge fund to trade
under the prime broker's name and assumes the role of the hedge
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fund with respect to the executing broker. On the other hand, the
prime broker plays the role of the executing broker with respect to the
hedge fund, for all future cash flows associated with the trade. The
prime broker could also act as agent, in which case the prime broker
clears and settles the trade on behalf of the hedge fund but does not
assume counterparty risk. Principal prime brokerage is most common
in the foreign exchange, OTC derivative and credit markets.
Exchange or cash traded securities are usually cleared on an agency
basis.
In 2008, the financial crisis has proven the need for the multi-prime
brokerage model. According to Sameer Shalaby, CEO of Paladyne
Systems, "(hedge fund) firms should consider that establishing
relationships with multiple prime brokers can spread the risk that their
assets will be in jeopardy if another crisis arises." (full article)
The process for a hedge fund to clear through multiple prime
brokerage firms has been made easy, thanks to the available
technologies. In as early as 2003, three leading foreign-exchange
prime brokers - Deutsche Bank, JP Morgan Chase and AIG Trading -
have casted aside competitive differences and teamed up to create
an online service for automating the "give-up" trade process, "to help
(executing brokers) give up their transactions electronically not just to
one prime broker but to all (of their) prime brokers"(more). Ron
Suber, head of global sales and marketing and a senior partner at
Merlin Securities, explains in an article dated Oct 2008 that Merlin's
technology allows funds to aggregate data from different prime
brokers on one system. "That has led to Merlin picking up dramatic
new business given its multi-prime services."
By Yifei Huang
Sources: Hedge Funds and Prime Brokers; Fixed Income Prime
Brokerage: Agency Model
Prime Brokerage Flows
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Industry Changes
Here is a short excerpt from Dealbook
on the recent dramatic changes in the
industry which have been reshaping the
competitive landscape of this space:
The prime brokerage landscape seems
to be changing amid the shake-up on Wall Street, according to
Investment Dealers‘ Digest. Two major prime brokers — Bear
Stearns and Lehman Brothers — are gone, while two more —
Morgan Stanley and Goldman Sachs — have had hundreds of clients
pull their money out of their prime brokerage units.
The result has been a boom for rivals like Deutsche Bank and Credit
Suisse, as well as independent prime brokers, which have all fought
for years to lure prime brokerage clients away from their big rivals.
The prime brokerage units inside the big investment banks provide
financing, clearing and settlement services for hedge funds, as well
as for other investors. These units hold on to billions of dollars of their
investors‘ cash and help execute their trading strategy.
But the demise of Lehman Brothers last month shook up this lucrative
business. Several hedge funds that had counted on Lehman‘s prime
brokerage unit were stunned to find out that their collateral was
frozen and that they could not get access to their money to make
trades. Some that depended on Lehman as their sole prime broker
remain paralyzed. Read more...
Stock Market Trading Volume
There was an article out today in the FT about low stock market
trading volume. I have heard this directly from prime brokerage firms,
I've also heard that managers are holding more cash than usual,
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taking more cautious trading positions than usual. The exception to
this seem to be those few funds which thrive during this type of
market volatility, but as the index figures which published this
morning show - most funds are working within negative territory for
2008. Here is the story:
Some of the steepest sell-offs and gains witnessed in an especially
volatile few weeks for Wall Street could have been exacerbated by
relatively low trading volumes as frightened hedge funds sat on the
sidelines.
This decoupling of volume and volatility in equity markets is just
another example of the reluctance of traders to speculate against a
backdrop of uncertainty over the global banking system and
economy, say analysts. On October 15, for example, when the S&P
500, Wall Street‘s benchmark equity index, dropped 9.9 per cent, its
largest one-day drop in more than 60 years, volume was only 11.5bn
shares. This was the third lowest volume day that month, with only
October 1 and 2, when the ban on short-selling financials was still in
effect, having lower trading levels. Indeed volume was only 58 per
cent of the record reported on October 10 when the S&P 500 fell just
1.2 per cent. Source
Asian Fund Leverage & Prime Brokerage
It seems that many Asian-based hedge
funds have dodged a few bullets by not
being tied as closely to Bear or Lehman...
that combined with traditionally using less
leverage than some other funds might
have helped a few Asian hedge funds
weather this storm. By a few I mean very
few - recent data suggests that Asian funds are down more than their
peers over the last few months. Below is an excerpt on how some
Asian funds have dodged the prime brokerage woes of US and UK
based groups:
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ASIAN hedge funds are relatively shielded from the distress that their
counterparts in developed markets are weathering, thanks to their
use of 'far less' leverage, said UBS head of prime services (Asia
Pacific) David Gray. ―Our clients have been extremely sensible in the
way they use gearing . . . and far more constrained in their use of
illiquids.‖ Still, Asian hedge funds could see redemptions of between
10 and 40 per cent. A clearer picture of the redemption rate is
expected to emerge in early November.
Funds' cash levels vary between 20 per cent and more than 50 per
cent, ―far higher than we have seen previously‖. A year ago, cash
levels were between 5 per cent and 10 per cent.
UBS yesterday hosted its third pan-Asian hedge fund conference.
The bank's prime brokerage is the third largest in Asia after Goldman
Sachs and Morgan Stanley, with a market share estimated at about
15-17 per cent. Prime brokerage continues to generate strong results
for the group.
Prime Brokerage Future
Future of Prime Brokerage | Shifts in Power
The last 3 months of market activity has led to a mass re-distribution
of power within the prime brokerage
industry. Here is a quote from John
Mack last week of Morgan Stanley
speaking to this effect and of
markets in 2009: Yet as Morgan
Stanley and other companies move
to reduce leverage, profit and
revenues have plunged, forcing
banks to cut back. "Any time you
take a business running at 30 times (leverage) and take it down to 16
to 17, that changes the nature of your business," he said. "We have
to look at that and resize it."
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As many as 30 percent of hedge funds are expected to go out of
business in the next year due to market losses and redemptions,
Mack said. As a result, revenues flowing through Morgan's prime
brokerage business will decline.
Morgan Stanley shares some of the blame for being overleveraged,
he said, and has been shedding assets and raising capital to reduce
its leverage ratio. Morgan Stanley now has less than $20 of assets for
every dollar of equity, down from more than $30. Source
Fidelity Prime Brokerage
Fidelity Investments is building out its prime
brokerage. The Boston company, well-known as a
mutual fund powerhouse, told the Financial Times, it is
expecting to add 50 hedge funds to its client base over the next
month. It currently is a prime broker to 300 hedge funds.
Fidelity said half its clients have $1 billion or more. The company has
been broadening its business model. It launched a prime brokerage
in 2003. Source
Margin Calls | Risk of Margin Calls Associated With Frozen Prime Brokerage Accounts
The motivation to multi-prime increased more this
week as hedge fund managers learn they may
have to meet margin calls on securities, which are
frozen within Lehman Brothers. Here is a short
excerpt from a news piece on this topic:
Oct. 15 (Bloomberg) -- Lehman Brothers Holdings Inc.'s hedge-fund
clients may have to pay more collateral on $65 billion of assets frozen
when the investment bank went bankrupt a month ago.
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Lehman's London-based prime brokerage has about 3,500 active
clients including hedge funds that own about $45 billion in securities,
Steven Pearson, the partner at PricewaterhouseCoopers responsible
for unraveling Lehman's U.K. operations, said in an interview. They
hold an additional $20 billion in short positions, or bets that prices will
fall.
While investors are largely unable to access their Lehman accounts,
the value of the securities continues to fluctuate along with the
markets. The clients may be required to put up more collateral if the
value of those securities drops, a process known as a margin call.
``If your bank fails, you still have to pay your mortgage,'' Pearson, 43,
said in an interview in Lehman's Canary Wharf office. ``Who is the
holder of the risk of the securities? The hedge funds. If the value of
the securities fell, they have to meet margin calls.'' Source
Prime Brokerage Mergers & Acquisitions
As the prime brokerage industry continues to
evolve I believe we will see further consolidation
among competitors and even more emphasized
bell shape to the industry. Here's a recent article
on this topic:
As the United States falters, its competitors are scheming. On
Monday, Dmitri Medvedev met with the leader of one of Russia's
largest conglomerates, Mikhail Fridman of the Alfa Group, and gave
his strong blessing for an acquisition of foreign banking holdings
(preferably American.) He interjected at one point: ―Maybe we should
also buy something while it‘s not too late?‖ and later insisted quite
strongly that "despite the crisis ... there are nonetheless some good
opportunities for concluding investment deals," to which Mr. Fridman
is reported to have said "this is absolutely correct...I fully share your
view," and so on.
They are not the only vultures circling. That same day, the Times
reported that, late last month, executives from France's mostly-still-
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solvent banks gathered to discuss opportunities in banking sectors
traditionally dominated by American companies. For Societe
Generale, that included a bid for investment banking and equity
derivatives. For BNP Paribas, it was the brokerage industry. And little
time was lost—last Wednesday, BNP Paribas bought over Bank of
America's prime brokerage unit and now competes with JP Morgan
and Goldman Sachs. Japanese companies are attempting to derive
similar benefits.
What can this all mean? One way to look at it is as a form of creative
destruction in action, with the American model of specialist banking—
that is, investment banks operating independently of commercial
banks—being more vulnerable than, say, the European universal
banks, though the latter have problems as well (for one thing, though
a large and diversified bank is more stable than a niche one, failure of
such a bank could be more catastrophic to the overall system). But
the American model is still more attractive than the Russian banking
model, which seems to depend on political favor and is less dynamic
besides, or the Japanese model, which is an unintended
consequence of absent investment opportunities within Japan itself.
Read more...
Prime Brokerage Singapore
When visitors arrive at Singapore's Changi Airport,
they get both an immigration card and an
application form for opening a hedge fund.
This was one of the jokes making the rounds in
2007. The fact is that hedge funds in Singapore
were growing fast since 2006. According to an
article dated Feb 2007 from eFinancialCareers, "prime brokers are in
hiring mode" - Barclays Capital, Citigroup, Lehman Brothers, Morgan
Stanley and UBS all hired for their Singapore prime brokerage
operations in 2006.
By Nov 2007, Singapore serves as prime broking regional
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headquarters for Credit Suisse Group, Citigroup Inc and Barclays
Capital plc, according to HedgeFund Intelligence. Citigroup and
Morgan Stanley also opened Singapore prime brokerage offices in
2007, to service the fast-growing number of hedge funds in that
market. Morgan Stanley, the top Singaporean prime broker by assets
under management according to Eurekahedge, had previously been
servicing its Singapore clients from Hong Kong.
As the growth of hedge funds slowed down due to the credit crisis, an
article (download pdf) dated Feb 2008 pointed out that "their
(referring to the prime brokers in Singapore) enthusiasm for growth is
now waning". As reported on Oct 4th, 2008, Morgan Stanley is looking
at scaling back its prime-brokerage operation (detail). However others
believe that "Asian hedge funds may be cold, but the Asian prime
brokerage industry remains sizzling"(FINalternatives), indicated by
Citi's move to add eight professionals to four Asia offices in Aug
2008, including transferring Danielle Vint to handle the prime
brokerage's fixed-income desk in Singapore.
It is said that Citi has fired "the latest salvo in the prime brokerage
talent wars in Asia". In Feb 2008, Merrill Lynch hired Aussie hedge
fund CEO Jeffrey Levy for Asia prime brokerage, to join the firm's
Singapore office. Levy's hire fills the hole left by Harvey Twomey,
who left Merrill Lynch to join Deutsche Bank as head of global prime
finance sales in Asia. Another source reports that in Sep 2008,
Deutsche Bank has moved Chris Pagan (LinkedIn) from Hong Kong
to Singapore in order to head prime brokerage for Southeast Asia.
by Yifei Huang
Prime Brokerage Software
Prime Brokerage is very competitive and industry players
are always looking for an edge.
Traiana is an example of a provider of financial
technology used by banks worldwide and prime brokers
involved in the foreign exchange industry. The company
has recently been selected to assist ABN AMRO by
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providing technological enhancements for use in their developing FX
prime brokerage service. Traiana, is headquartered in San Mateo,
California, with offices in New York, Chicago, London, and Tel Aviv.
Customers include ABN AMRO, AIG Trading, CSFB, Deutsche Bank,
JP Morgan Chase, Morgan Stanley, and Societe Generale. Source
In a bid to gain market share in the ultracompetitive prime brokerage
market, Credit Suisse First Boston has added a customized risk
assessment and trading system to its prime brokerage unit. The new
system will allow CSFB to provide its institutional clients with risk
assessment across their holdings in the equity, fixed income, foreign
exchange and derivatives markets, according to Philip Vasan, global
head of prime services. CSFB has been considering systems to
accomplish this for more than a year, he said.
Recently, Advent Software has been selected by Jefferies &
Company Inc., a top tier global investment bank and institutional
securities firm, to provided their Advent‘s Geneva® to help in
management of Jefferies‘ growing prime brokerage offerings. Advent
Geneva® now serves eight out of ten of the top prime brokerage
firms worldwide and is innovative beyond competitors as to its global
investment management and accounting platform. Source
An Explanation | Prime Brokerage Leverage
One of key functions of prime brokers is to provide
financing to its hedge fund clients, so they can
acquire the leverage needed for their strategies.
Since with leverage can come increased risk, the
prime broker generally determines the degree of leverage that can be
extended to hedge funds using a combination of stress-testing and
value-at-risk, on a portfolio by portfolio (or client by client) basis. Due
to the recent credit crunch, "Leverage is being closely watched," said
Josh Galper, managing principal of Vodia Group, which advises
hedge funds on borrowing strategies. "…the amount of leverage
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being utilized is being reviewed much more carefully than it has been
in the past, for obvious reasons." (See article from MarketWatch)
There are two major methods that a prime broker can lend leverage
to a hedge fund. The first is by providing margin financing; in other
words, the hedge fund borrows some portion of the security's value
from the prime broker. For example, the hedge fund holds a portfolio
with a value of $100 million, using $25 million of its own assets and
$75 million of margin debt provided by the prime broker. This way the
hedge fund achieves a leverage of 4 to 1 (assuming only long
positions), and the prime broker gains interest on the debt.
The alternative way of extending leverage is through the OTC
derivatives. While the structure of this form of financing varies, one
approach takes the form of a managed account swap, and is usually
termed "synthetic prime brokerage". The prime broker sets up an
account advised (or managed) by hedge fund manager who has
trading discretion. So different from the first method, in this case even
though hedge fund manager trades the account to implement the
hedge fund's strategy, the portfolio actually belongs to the prime
broker. The prime broker then enters into a total return swap with the
hedge fund, and charges the interest in the form of a swap payment
received from the hedge fund.
Through this synthetic prime brokerage service, the leverage used by
the fund is determined by the amount of margin on the swap required
by the prime broker. To follow the example above, the prime broker
has an account with $100 million of its own assets. The account is
advised by the hedge fund manager, where the hedge fund is the
counterparty to a total return swap on that account. As margin for the
swap, the prime broker requires the hedge fund to post $25 million of
equity; thereby providing leverage of 4 to 1.
Many hedge funds use synthetic prime brokerage service as part of a
full service prime brokerage agreement - with equity swaps used side
by side with stock loan and other services for particular parts of their
portfolios, according to an article by HedgeWeek.
Source: Hedge Funds and Prime Brokers
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Guest post by Yifei Huang
Prime Broker Service Fees
Prime brokers don‘t charge fees for many of the services they provide
to hedge funds. Instead, profits are
usually derived from three sources:
spreads on financing (including stock
loan), commissions from trading, and fees
for the settlement of transactions done
away from the prime broker. The financing
and lending spreads, which are charged in
basis points on the value of client loans (debit balances), client
deposits (credit balances), client short sales (short balances), and
synthetic financing products. Therefore, clients who take substantial
short-selling or major amounts of leverage are representatives of
more lucrative opportunity than clients who do relatively less short
selling and/or use minimal leverage
For example, it is said, that hedge funds will pay on Wall Street
record fees next year for brokerage services. This business is
currently dominated by Morgan Stanley, and Goldman Sachs Group
Inc. Sources say that prime-brokerage fees may increase
significantly, by almost a third, to $9US.9-billion in 2009.
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Lehman Bankruptcy Victims | Hedge Funds
The following is a short and far from exhaustive list of hedge funds
which were recently affected by Lehman Brother's bankruptcy.
London-based MKM Longboat Capital Advisors LLP said last
week it will close its $1.5 billion Multi-Strategy fund in part
because of assets stuck at Lehman
Lehman Brothers Holdings Inc.'s bankruptcy probably means
the end of hedge-fund manager Oak Group Inc. after 22 years
in business.
Diamondback Capital Management LLC, a Stamford,
Connecticut-based hedge fund, told investors that it had assets
of $777 million stranded in Lehman
Managers with a smaller percentage of assets in Lehman limbo
include Harbinger Capital Partners, Amber Capital LP and Bay
Harbour Management LLC, which are each based in New York,
and RAB Capital Plc and GLG Partners Inc., both in London
Darden Capital Management, an investment club run by
students of the University of Virginia's business school, has
about $6 million in four funds that are stranded.
Guest post by Market Folly
Permanent Link: Lehman Brothers Bankruptcy Victims - Hedge
Funds
GLG Partners Exposure to Lehman Brothers
Here is a letter to investors put out by GLG partners on their
homepage earlier this week. It addresses the firm's exposure to
Lehman Brothers in midst of that firms bankruptcy…
Dear GLG Fund Investor,
We wanted to update you about the impact to us arising from the
administration proceedings of Lehman Brothers International
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(Europe) ("LBIE‖), and the insolvency proceedings of other entities in
the Lehman Brothers group. In total, we currently estimate that the
combined direct exposure of the GLG Funds to be approximately $95
million, or less than 1% of GLG's net AUM. We have detailed each
Fund‘s potential exposure stemming from LBIE's administration in
letters to the investors in those Funds.
Our assessment of the LBIE exposure is based upon a number of
assumptions (including, that amounts LBIE was required to treat for
each Fund as client money and not use in the course of its business
were and are, in fact, so held and will be released upon repayment by
each Fund of all its debt to LBIE) and in accordance with legal and
professional advice obtained. That said, until we are able to fully
reconcile our information and assumptions with the administrators of
LBIE, our estimates could change.
Since at least the beginning of 2008, in addition to steps taken to
significantly reduce our Fund assets held with LBIE, we negotiated to
more fully protect any remaining assets and transactions through a
series of bespoke arrangements. We have good reason to believe
that these arrangements were adhered to by LBIE but until we meet
with the Administrators some uncertainty will remain. We have been
pressing to begin a constructive dialogue with the Administrators
soon, which will enable us to refine our assessment further.
Lastly, we are evaluating with the directors of our Funds how to
address Fund NAV's and the October 1, 2008 dealing day. At this
point, we believe that all of our Funds will be able to publish a dealing
NAV as at October 1 by writing down the estimated exposure to LBIE
to fair value. We believe NAVs will be published in the normal periods
of time, except in a few cases where there may be a short delay while
our estimates are further refined and valued. In the event that one or
more Funds are ultimately unable to publish a timely NAV, the
directors of these Funds will consider a number of alternatives all of
which will be designed to treat all Fund shareholders equally,
minimize disruption to the investment process, enable the Funds to
continue to invest and permit redemption of shares in the funds.
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If you have any questions, please feel free to contact your
representative with any questions.
Best Regards,
GLG Partners LP
Lehman Bankruptcy Mess
Here is a Business Week article on the mess
with Lehman Brothers:
The Lehman Brothers bankruptcy is quickly
becoming one giant mess. Scores of hedge
funds that had hundreds of millions in cash
and other securities parked with Lehman‘s
prime brokerage operation in London have had their accounts frozen.
A number of these hedge funds have filed formal objections with the
bankruptcy court and at least one fund, New York-based Bay Harbour
Management, is mounting a legal challenge to the court‘s hastily-
approved sale of Lehman‘s brokerage arm to Barclays Capital.
Now a new and even more troubling scenario is arising: legal
disputes stemming from the estimated $1 trillion in derivatives
transactions that Lehman had entered into on behalf of itself and
some of its customers. Already, at least three lawsuits have been
filed, alleging that nearly $600 million in collateral posted by some of
Lehman‘s trading partners in derivatives transactions hasn‘t been
returned and is in jeopardy of disappearing as the bankruptcy
process unfolds.
To date, the most aggrieved of Lehman‘s trading partners is Bank of
America, which at onetime was considering buying Lehman as the
investment firm was lurching towards bankruptcy. The Charlotte, NC
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based lender is seeking to recover nearly $500 million the bank
―posted as collateral to ―support derivative transactions between BofA
and the respective Lehman Entities,‘‘ according to a lawsuit filed in
New York State Supreme Court. Read more...
Salary Levels - Prime Brokers
According to www.indeed.com/salary Prime
Brokerage Salaries in the United States are vary in
different states. The average salary for entry-level
prime broker in the US is $49,000 as of recent.
However in NY, MA, IL, CA the average salary for
entry-level prime brokers are much higher and these
numbers relatively are $57K, $55K, $51K and $48K.
For junior prime brokers, the average salary in the US is $52,000. In
NY, MA, IL and CA these numbers are $61K, $58K, $54K and $51K.
The average salary for senior executives is much higher than junior
and entry level prime brokers since this number is $80,000 within the
US. In the NY, MA, IL, CA relatively are $94K, $90K, $84K and $79K.
What these numbers seem not to include are the monthly
commission checks which are cut to successive prime brokerage
relationship managers. These individuals can make $5,000-
100,000/month through trading commissions alone.
Rehypothication Risks, Rights & Costs
Here is a short article about the
Rehypothication by prime brokerage firms,
the definition of it, the risks of prime brokers
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using the strategy, the rights of hedge funds who loose access to
their assets and what happens to the cost of prime brokerage
services when hedge funds request for their assets not to be
rehypothicated.
Here is a short excerpt from the article:
The dangers for hedge funds of having their assets rehypothecated
became painfully clear last week: $22bn of the $40bn held by
Lehman‘s European prime brokerage had been rehypothecated.
Hedge funds trying to reclaim the rehypothecated assets have found
themselves in the queue of general creditors, likely to get back only a
proportion of their money.
Even those hedge funds which had insisted they did not want their
assets rehypothecated – such as Amber and a small RAB Capital
fund – face a long and potentially painful wait to get back securities
held in segregated client accounts. PwC, administrators of Lehman‘s
London business, have told hedge funds it is likely to take months to
calculate how much is due to whom, and to offset this against debts.
But it is rehypothecation which poses the biggest threat to hedge
funds, and could lead to the biggest changes in the prime brokerage
industry. The main prime brokers were almost completely self-
funding, according to current and former executives, needing very
little access to the balance sheet of their parent bank, thanks to
hedge fund cash kept on deposit and the rehypothecation of assets.
Most of the cash has already gone, hedge fund managers say,
shifted away from prime brokerages to banks regarded as safer. Take
away rehypothecation, and banks will have to borrow at far more
expensive rates in order to lend to hedge funds, pushing down their
profitability and pushing up the cost of borrowing. Read more...
Prime Brokerage Assets from Lehman
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The following is an excerpt from a recent
story about hedge fund assets being stuck
within Lehman's prime brokerage business:
Lehman Brothers Holdings Inc. will take
``considerable time'' before returning assets
stranded by the world's largest bankruptcy to hundreds of hedge fund
clients, according to PricewaterhouseCoopers.
``This process could take several months,'' said PwC, Lehman's
bankruptcy administrator in London, in a statement today. PwC said it
is working ``very closely'' with the U.K.'s Financial Services Authority
to sort out how much is owed to ``many hundreds of clients'' with
securities tied up at Lehman.
GLG Partners Inc., which oversees $24 billion, CQS U.K. LLP and
Bay Harbour Management LC are among the hedge funds that used
Lehman as a prime broker for borrowing stock and clearing trades.
Funds with assets at Lehman probably will have to write them down
when they report net asset values, according to Laven Partners LLP,
a London-based hedge fund consultant.
``If your hedge fund assets have been included with Lehman's, you're
in the back of a queue that's quite long,'' said Laven Partners founder
Jerome Lussan. ``What's the market value of, say, $100 million that's
owed to you by Lehman? I'd say it's not that great, and it's going to
have to be written down.''
Prime Brokerage Services List
Here is a short list of prime brokerage services:
Lending Securities
Hedge Fund Startup Services
Accessing local shares abroad
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Cash Management
Capital Introductions - Asset Raising
Real Estate Identification or Office Space - Hedge Fund hotels
Access to Hedge Fund Lawyers focusing on hedge fund clients
Headhunting & talent identification to help build portfolio
management teams
Third Party Marketing Due Diligence
Clearance & Custody of Assets
Portfolio Reporting
Branding & Marketing
IT Consultations
Compliance & Risk Management
Permanent Link: Prime Brokerage Services
Prime Broker Survey
A new survey shows that more than one-third
of hedge fund and CTA managers are
dissatisfied with their prime brokers. The
most notable dissatisfaction is with the prime
brokers‘ personal service. In 2007 80% of
funds rated the personal service of their
prime brokers as either ―good‖ or ―excellent‖, this year only 63% gave
their prime brokers high marks. This may be a result of the liquidity
crisis, which 16% of the managers said negatively effected the
relationship with their prime broker.
The survey also shows that many funds are happy with the cost of
their prime brokers, with only 7% responding ―poor‖. However, a
considerable 38% of managers rating their prime brokers as ―poor‖
performers of capital introduction. Funds who consider themselves
technologically advanced are the most satisfied with their prime
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brokers.
Prime Brokerage + Administration
More prime brokerage firms are adding on
administration services to help attract and retain
clients. I wasn't sure how widespread of a trend
this was but saw this mentioned within an article
yesterday as noted below.
In recent years, the custodian banks that have acquired hedge fund
administrators have sought to adjust client lists in favor of larger and
more profitable hedge fund and fund of funds groups interested in a
broader array of services. At the same time, prime brokers have
recognized that providing administration services can help attract and
retain clients and counter the shift among hedge fund managers
towards multiple prime brokerage.
"It would be surprising if the hedge fund administration industry
continues to support such a large number of providers, and there is
now evidence that a renewed round of consolidation is in the offing,"
says Dominic Hobson. "However, the appetite to sell may be offset as
well as encouraged by the depressed prices available. In any event,
the buyers are likely to be different from the banks which dominated
the acquisition process in the early years of this century." Read
more...
Asian Prime Broker Growth Trend
Here is an interesting article about the growth of
prime brokerage services in Asia. I didn't know that
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growth was so strong for these groups right now...
Citigroup expects the amount of assets serviced by its Asia Pacific
prime brokerage arm to grow by more than 30 percent annually over
the next three to five years, as more global hedge funds set up shop
in the region.
Even with tumbling stock markets hammering Asia's hedge fund
industry, many large international managers are doing more business
in the region, drawn by its long-term potential, said Hannah Goodwin,
head of Prime Finance, Asia Pacific for the U.S. banking giant.
"We're looking at a 30 to 50 percent growth every year," she told
Reuters in an interview. "That's how aggressive we want to be with
this business and how well we think this business is going to develop
for us."
Explain Prime Brokerage
Prime brokerage is the generic name for a bundled package of
services offered by investment banks and securities firms to hedge
funds and other professional investors needing the ability to borrow
securities and cash to be able to invest on a leveraged basis and
achieve an absolute return. The business advantage to a hedge fund
of using a Prime Broker is that the Prime Broker provides a
centralized securities clearing facility for the hedge fund, and the
hedge fund's collateral requirements are netted across all deals
handled by the Prime Broker. The Prime Broker benefits by earning
fees ("spreads") on financing the client's long and short cash and
security positions, and by charging, in some cases, fees for clearing
and/or other services. It also earns money by hypothecating the
portfolios of the hedge funds it services and charging a fee to those
borrowing securities and other investments.
The following services are typically bundled into the Prime Brokerage
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package:
* global custody (including clearing, custody, and asset servicing)
* Securities lending
* Financing (to facilitate leverage of client assets)
* Customized Technology (provide hedge fund managers with
portfolio reporting needed to effectively manage money)
* Operational Support (prime brokers act as a hedge fund's primary
operations contact with all other broker dealers)
In addition, certain prime brokers provide additional "value-added"
services, which may include some or all of the following:
* Capital Introduction - A process whereby the prime broker attempts
to introduce its hedge fund clients to qualified hedge fund investors
who have an interest in exploring new opportunities to make hedge
fund investments.
* Office Space Leasing and Servicing - Certain prime brokers lease
commercial real estate, and then sublease blocks of space to hedge
fund tenants. These prime brokers typically provide a suite of on-site
services for clients who utilize their space.
* Risk Management Advisory Services - The provision of risk analytic
technology, sometimes supplemented by consulting by senior risk
professionals.
* Consulting Services - A range of consulting / advisory services,
typically provided to "start-up" hedge funds, and focused on issues
associated with regulatory establishment requirements in the
jurisdiction where the hedge fund manager will be resident, as well as
in the jurisdiction(s) where the fund itself will be domiciled.
Contents
* 1 History
* 2 Fees
* 3 Risks
* 4 Sources of Information
* 5 List of Prime Brokers
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History
The basic services offered by a prime broker give a money manager
the ability to trade with multiple brokerage houses while maintaining,
in a centralized master account at their prime broker, all of the hedge
fund‘s cash and securities. Additionally, the prime broker offers stock
loan services, portfolio reporting, consolidated cash management and
other services. Fundamentally, the advent of the prime broker freed
the money manager from the more time consuming and expensive
aspects of running a fund. These services worked because they also
allowed the money manager to maintain relationships with multiple
brokerage houses for IPO allocations, research, best execution,
conference access and other products.
The concept and term "prime brokerage" is generally attributed to the
U.S. broker-dealer Furman Selz in the late 1970s. However, the first
hedge fund operation is attributed to Alfred Winslow Jones in 1949. In
the pre-prime brokerage marketplace, portfolio management was a
significant challenge; money managers had to keep track of all of
their own trades, consolidate their positions and calculate their
performance regardless of which brokerage firms executed those
trades or maintained those positions. The concept was immediately
seen to be successful, and was quickly copied by the dominant bulge
bracket brokerage firms such as Morgan Stanley, Bear Stearns,
Merrill Lynch, Lehman Brothers, and Goldman Sachs. At this nascent
stage, hedge funds were much smaller than they are today and were
mostly U.S. domestic long-short equities funds. The first non-U.S.
prime brokerage business was created by Merrill Lynch's London
office in the late 1980s.
Through the 1980s and 1990s, prime brokerage was largely an
equities-based product, although various prime brokers did
supplement their core equities capabilities with basic bond clearing
and custody. In addition, prime brokers supplemented their
operational function by providing portfolio reporting; initially by
messenger, then by fax and today over the web. Over the years,
prime brokers have expanded their product and service offerings to
include some or all of the full range of fixed income and derivative
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products, as well as foreign exchange and futures products.
As hedge funds have proliferated globally through the 1990s and the
current decade, prime brokerage has become an increasingly
competitive field and an important contributor to the overall
profitability of the investment banking business. As of 2006, the most
successful investment banks each report over two billion dollars in
annual revenue directly attributed to their prime brokerage operations
(source: 2006 annual reports of Morgan Stanley and Goldman
Sachs).
Fees
Prime brokers do not charge a fee for the bundled package of
services they provide to hedge funds. Rather, revenues are typically
derived from three sources: spreads on financing (including stock
loan), trading commissions and fees for the settlement of transactions
done away from the prime broker. The financing and lending spreads,
which are charged in basis points on the value of client loans (debit
balances), client deposits (credit balances), client short sales (short
balances), and synthetic financing products such as swaps and CFDs
(Contract for difference), make up the vast majority of prime
brokerage revenue. Therefore, clients who undertake substantial
short-selling or leverage represent more lucrative opportunity than
clients who do relatively less short selling and/or utilize minimal
leverage. Clients whose market activities are principally fixed income
oriented will generally produce less prime brokerage revenue, but
may still present significant economic opportunity in the repo, foreign
exchange (fx), futures, and flow business areas of the investment
bank.
Risks
Prime Brokers facilitate hedge fund leverage, primarily through loans
secured by the long positions of their clients. In this regard, the Prime
Broker is exposed to the risk of loss in the event that the value of
collateral held as security declines below the loan value, and the
client is unable to repay the deficit. In practice, such conditions arise
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only in the case of extraordinary volatility or unexpected correlation
reversions and are exceedingly rare. Other forms of risk inherent in
Prime Brokerage include operational risk and reputational risk.
Large prime brokerage firms today typically monitor the risk within
client portfolios by either Value at Risk (VaR) or "Rules Based" stress
testing. Stress testing entails running a series of what-if scenarios
that identify the potential gains or losses for each position due to
adverse market events.
Examples of stress test scenarios include:
* Flight to Quality
* 1% up or down parallel movement in 10 year treasury yield curve
[edit] Sources of Information
Berman, An Introduction to Hedge Funds (Risk Books 2007) Berman
(editor), Hedge Funds and Prime Brokers (Risk Books 2006).
[edit] List of Prime Brokers
The following firms are known to be providing prime brokerage
services at present:
* ABN AMRO (bought by RBS led consortium)
* Banco Espirito Santo
* Bank of America, sold PB business to BNP Paribas
* Barclays Capital
* (Bear Stearns, previously one of the dominant prime brokers, was
merged into JPMorgan Chase in March, 2008)
* BNP Paribas
* Calyon Financial
* Citigroup
* CIBC World Markets
* Credit Suisse
* Deutsche Bank
* Dresdner Kleinwort
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* Fidelity Investments
* Fortis
* Goldman Sachs
* Interactive Brokers
* Jefferies & Company
* JPMorgan Chase
* Lehman Brothers (Bought by Barclays Capital [US Operations],
Bought by Nomura September, 2008 [Asia, EU, India Branches])
* Merlin Securities (Introduces through JP Morgan and Goldman
Sachs)
* Merrill Lynch (bought by Bank of America - September, 2008)
* Morgan Stanley
* Nordea
* Northern Trust
* NewEdge Group (ex Fimat & Calyon Financial)
* RBS
* RBC Capital Markets
* Rabobank
* Scotia Capital
* SEB
* Triad Securities
* UBS
Source
Hedge Fund Due Diligence
Last month someone sent me this resource on due diligence. Fortis
offers this guide to investment due diligence which goes
beyond the initial selection process. The article focuses
primarily on identifying potential problems by maintaining
contact with hedge fund managers and thoroughly looking
into the operations.
Although much can be learned from traditional due diligence, Fortis
suggests simply talking with the staff and manager. They suggest that
a practical understanding of psychology helps detect the underlying
factors that could effect a manager's performance. This article
advocates a close relationship with the manager, adding a level of
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transparency for the investor and includes helpful tips for building this
relationship.
Here is the full resource: Fortis Due Diligence Article
Prime Brokers in Asia / Japan / China
I recently read a short article about the prime brokerage
business in Asia through FinAlternative's prime
brokerage survey. Asia has a vastly expanding hedge
fund industry, and prime brokerages are bolstering their
capacity in Asia by buying up talented executives from
the top firms.
Major firms like Merrill Lynch and Morgan Stanley have struggled to
retain their top executives in Asia from rival prime brokerages.
Goldman Sachs now claims five managing directors of its Asian
prime brokerage division, and has plans to have another series of
major hiring. Asia, being the fastest growing hedge funds market, has
become more and more important for successful prime brokerages.
Prime Brokerage Business Update
Here are a few details from a recent report
from Finalternatives on the prime brokerage
business. This report mentioned that prime
brokerage firms expect $11 billion in hedge
fund revenues this year, consequently major
prime brokerage firms are vigorously
competing for clients. JPMorgan and
CitiGroup are playing catch-up with industry giants by bolstering their
prime brokerage units. Meanwhile, the more established Deutsche
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Bank, Morgan Stanley, Merrill Lynch and Goldman Sachs are battling
for dominance over the prime brokerage industry.
The two biggest prime brokers, Goldman Sachs and Morgan Stanley,
are building their reputation as the best in the industry. More and
more hedge funds turn to the two firms because they have a strong
reputation, as well as superior technology and support capabilities.
While other major firms try to catch up by buying up talent from rivals,
Morgan Stanley and Goldman Sachs are securing their dominant
positions in prime brokerage.
Prime Brokerage Book Review
I'm reading a book right now on prime brokers called
Hedge Funds and Prime Brokers. I am about 1/3 of the
way through the book right now and will publish a review
of it once I am done reading the whole thing. This is the
only book I have been able to find on prime brokerage.
Does anyone else know of any great books on this niche of the hedge
fund industry? Thanks in advance for any help you can lend me
Prime Brokerage Sales
While the credit crisis has hurt most financial firms, some boutique
prime brokers have benefited. As hedge funds look out for their best
interest, smaller prime brokerage
shops are becoming more
attractive than the largest firms. As
major brokers reduce their less-
profitable hedge fund accounts,
boutique primes take on these
clients. Another opportunity for
boutiques is that the big firms are
cutting back on staff, making it easy
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to attract seasoned talent to join the smaller firms. Many of these
veterans bring some clients with them too.
The credit crisis has in many ways helped boutique prime brokers,
but it has also hurt their capital introduction capabilities. A recent
FINalternatives survey revealed that over a third of all hedge funds
rated their prime broker's capital capabilities as "poor". But the survey
also showed that nearly 75% of hedge fund managers that called
their prime broker's personal service "poor" are shopping for a new
one. Many average-size funds are not given the attention from big
firms that the smaller prime brokers promise; and as long as this
neglect continues, boutique prime brokers will.
Prime Brokerage New York / Evolution
The prime brokerage industry is constantly
evolving adapting to new client demands,
opportunities and regulatory environments. I was
in New York yesterday discussing some of these
ongoing changes with a few prime brokerage
professionals and they mentioned that several
times a year there are events, which slightly re-
shape their industry.
If you haven't read it already there was an
interesting article put out by ICFA a few days ago
about the changing landscape of the hedge fund
prime brokerage business model.
by traditional investment managers. This is leading prime brokerage
The main point of change that this article pointed to was the
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widespread interest in hedge fund‘s clients to service clients who also
run 130/30 and long only portfolios as well.
"According to a recent Vodia Group survey traditional asset
managers have 3 per cent of their asset base - equivalent to $1.95trn
- in leveraged investments, with 86 per cent of major asset managers
expecting to run 130/30s by mid-2009. The firm predicts that
leveraged assets will increase from $2.65trn today to $4.48trn in
2012, driving greater demand for prime brokerage services."
"But traditional asset management clients are forcing prime brokers
to adapt their business model, placing greater emphasis on custody,
reporting and risk management and de-emphasizing capital
introduction and leverage. These factors will push margins lower and
increase operational requirements in the prime brokerage business,
Vodia said."
While I can see why the largest of institutional money managers are
not going to be drawn by the hopes of capital introduction I still
believe that those prime brokers who do offer capital introduction
services will have a competitive advantage while competing for the
business of hedge fund managers here in the US. Every year the field
becomes more competitive, and most hedge funds need help
marketing and raising capital.
Prime Brokerage Survey
A Recent Prime Brokerage Survey
FinAlternatives just released a prime brokerage survey; it contains
some interesting details on how satisfied hedge funds are with their
prime brokerage service providers. The survey digs into the quality of
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capital introduction, execution and personal service received from
their prime broker. What is interesting was that 38% of hedge fund
Manager respondents noted that their prime broker's capital
introduction capabilities were non-existent or very weak. Another
interesting point was that poor personal service was the #1 reason
that a hedge fund manager would switch prime brokers.
Here is the full report and prime brokerage survey.
Prime Brokerage Market Share
A good read titled "Battle of the Bulges"
pointed out that competition for gaining prime
brokerage market share is growing fiercer with
more than $11 billion in expected hedge fund
revenues in 2008, a 15% increase over 2006
(reported by TABB Group). The fight for market
share is even more intense among the
industry's top players.
For years the prime brokerage industry has been dominated by three
firms—Goldman Sachs, Morgan Stanley and Bear, which collectively
owned about two-thirds of the market. As of year-end 2006, the
Lipper HedgeWorld prime brokerage league table ranked Morgan
Stanley first (with 23% of the market and $153 billion in assets),
followed by Bear (21%, $136 billion), Goldman (18%, $119 billion),
UBS (7%, $47 billion) and Credit Suisse (4%, $25 billion), in terms of
market share based on assets.
As Bear collapsed in March 2008, and Morgan Stanley and Goldman
Sachs struggle to maintain their dominance in the industry, other
major financial services firms are stepping up their prime brokerage
efforts, including JPMorgan Chase, Deutsche Bank, UBS, Credit
Suisse and BNP Paribas. JPMorgan Chased was only ranked eighth
in the Lipper survey with just a 2.3% market share, now it is given a
quick entry into prime brokerage as long as Bear's hedge fund clients
are successfully locked down. BNP Paribas bought Bank of
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America's equity prime brokerage division that was ranked the sixth-
largest in the country by assets at the end of 2006 by Lipper
HedgeWorld, thus was instantly made one of the largest prime
brokers in the U.S.
The recent turbulence in the prime brokerage industry also
accelerated the trend of hedge funds moving away from replying on
just one prime broker. Traditionally hedges funds are unwilling to
switch prime brokers or increase the number of their prime brokers
(TABB report). As Michael Guarasci, partner at hedge fund Indus
Capital Partners said, "We have long-standing relationship with our
prime brokers, so if a new company wants to come in and do
business with us, it may not get anywhere because we're pretty
happy with our service. It's not easy to switch prime brokers." (full
article). Now more and more hedge funds are adding prime brokers
to limit counterparty risk since the fall of Bear (ref). This created
considerable opportunity for new players to enter or existing players
to take a bigger piece of the market share, as pointed out in an article
by Merrill Lynch: "The multi-prime broker environment overcoming
the challenges and reaping the benefits" (download the pdf).
Guest post by Yifei Huang
Prime Brokerage Association (PBA)
The Prime Brokerage Association (PBA) is a
600 person strong networking organization
focused on the hedge fund prime brokerage
industry. The Prime Brokerage Association
provides free-to-access articles and resources
to prime brokerage professionals, serves a
source of inter-industry networking and works to improve the overall
image of the prime brokerage industry to the general public.
To Join the PBA Click Here
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Capital Introduction Team Due Diligence
It is important to conduct due diligence on the
capital introduction team you might begin
working with before you sign up for their related
prime brokerage services. Here the areas we
suggest you investigate before moving your
prime business:
How many professionals are dedicated to working on your
capital introduction team?
What are your capital introduction fees on top of the regular
prime brokerage fees?
Do you have a detailed description of what your capital
introduction services includes and does not include?
How has your capital raising track record evolved since you
began offering capital introduction services to your clients?
How does your firm partners or work with third party marketing
firms or outside capital introduction experts?
In addition to these questions search their website and online for
capital introduction jobs related to the firm. If they are hiring 10 year
industry veterans or fresh college graduates this can tell you a bit
about their approach as well.
The Problem With Capital Introductions
The main problem with capital introductions being made by prime
brokerage firms is that many firms are not competitive enough to
market. Many managers with negative or sub-par performance would
still like to grow their business but the fact is most investors won't
consider hedge fund managers who are both relatively small and
have mediocre or poor performance, there is nothing engaging
enough that will convince investors to look past those two facts, they
hear hundreds of stories and see as many teams pitching their
outlook on the markets each year.
This leaves prime brokerage firms with two choices - offer capital
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introduction services knowing that there is almost no chance of
raising assets or tell the hedge fund manager that they will not be
able to market their strategy. The best prime brokers will often help
with pre-marketing activities such as operational and risk
assessments, marketing material scrubbing, newsletter development,
etc.
This may seem straightforward but it is often an unsaid thorn in the
side of prime brokerage firms offering capital introductions for hedge
fund managers. They want to provide this service to everyone
possible but by nature only 10-25% of all clients really qualify for the
service.
US Prime Brokerage
I recently commented about how unwise it was to
only have one prime broker and separately about
how concerns were starting to focus on Morgan
Stanley and Goldman, something that would have
until this weekend seemed laughable.
Well, it appears that prime brokerage clients of Morgan Stanley and
Goldman have started getting jitters, to the delight of other prime
brokers with banking parentage. With Lehman Administrators
confirming that there would be no early return of Prime Broking client
assets, hedge funds are starting to look at migrating some of their
business.
Until now, Goldman and Morgan Stanley were the prime brokers
firms wanted to be with. They dominated the prime broking market
and had their choice of which clients to accept. For most firms, an
account with GS or MS was a seal of approval that they could show
to investors, since those brokers didn't accept "dodgy" accounts.
Read more here... Permanent Link: US Prime Brokerage
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Prime Brokerage Chicago
I recently interviewed a prime brokerage partner in Chicago, IL and
he shared the following industry trends with me:
Capital introduction services are in higher demand than ever
The strongest prime brokerage teams aren't always the most
well known or largest in size as they have problems serving all
of their clients well
Service is still a competitive advantage for many prime
brokerage firms who are used to working with clients tired of the
large prime shops not giving them any service
If you are looking for prime brokerage contacts in Chicago please
email team@PrimeBrokerageAssociation.org.
Prime Brokerage Clearance Services
Clearing is one of the many services prime brokerage firms offer.
Lately most hedge funds which I have spoken to are switching prime
brokerage firms or adding a second prime broker due to main
reasons:
Service Issues
Capital Introduction Services
Many funds seem to care less about some of the mechanics behind
how their funds are serviced as they seem almost identical - while
caring greatly about the level of service and any capital introduction
services which may exist while working with a certain prime
brokerage shop.
An Explanation | Prime Brokerage Derivatives
One of key functions of prime brokers is to
provide financing to its hedge fund clients, so
they can acquire the leverage needed for their
strategies. Since with leverage can come
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increased risk, the prime broker generally determines the degree of
leverage that can be extended to hedge funds using a combination of
stress-testing and value-at-risk, on a portfolio by portfolio (or client by
client) basis. Due to the recent credit crunch, "Leverage is being
closely watched," said Josh Galper, managing principal of Vodia
Group, which advises hedge funds on borrowing strategies. "…the
amount of leverage being utilized is being reviewed much more
carefully than it has been in the past, for obvious reasons." (See
article from MarketWatch)
There are two major methods that a prime broker can lend leverage
to a hedge fund. The first is by providing margin financing; in other
words, the hedge fund borrows some portion of the security's value
from the prime broker. For example, the hedge fund holds a portfolio
with a value of $100, using $25 million of its own assets and $75
million of margin debt provided by the prime broker. This way the
hedge fund achieves a leverage of 4 to 1 (assuming only long
positions), and the prime broker gains interest on the debt.
The alternative way of extending leverage is through the OTC
derivatives. While the structure of this form of financing varies, one
approach takes the form of a managed account swap, and is usually
termed "synthetic prime brokerage". The prime broker sets up an
account advised (or managed) by hedge fund manager who has
trading discretion. So different from the first method, in this case even
though hedge fund manager trades the account to implement the
hedge fund's strategy, the portfolio actually belongs to the prime
broker. The prime broker then enters into a total return swap with the
hedge fund, and charges the interest in the form of a swap payment
received from the hedge fund.
Through this synthetic prime brokerage service, the leverage used by
the fund is determined by the amount of margin on the swap required
by the prime broker. To follow the example above, the prime broker
has an account with $100 million of its own assets. The account is
advised by the hedge fund manager, where the hedge fund is the
counterparty to a total return swap on that account. As margin for the
swap, the prime broker requires the hedge fund to post $25 million of
equity; thereby providing leverage of 4 to 1.
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Many hedge funds use synthetic prime brokerage service as part of a
full service prime brokerage agreement - with equity swaps used side
by side with stock loan and other services for particular parts of their
portfolios, according to an article by HedgeWeek.
Source: Hedge Funds and Prime Brokers
Prime Broker Investments in Technology
Traiana is a leading provider of financial technology
used by banks worldwide and prime brokers involved in
the foreign exchange industry. The company has
recently been selected to assist ABN AMRO by
providing technological enhancements for use in their
developing FX prime brokerage service. Traiana, is
headquartered in San Mateo, California, with offices in
New York, Chicago, London, and Tel Aviv. Customers include ABN
AMRO, AIG Trading, CSFB, Deutsche Bank, JP Morgan Chase,
Morgan Stanley, and Societe Generale. Source
In a bid to gain market share in the ultracompetitive prime brokerage
market, Credit Suisse First Boston has added a customized risk
assessment and trading system to its prime brokerage unit. The new
system will allow CSFB to provide its institutional clients with risk
assessment across their holdings in the equity, fixed income, foreign
exchange and derivatives markets, according to Philip Vasan, global
head of prime services. CSFB has been considering systems to
accomplish this for more than a year, he said.
Recently, Advent Software has been selected by Jefferies &
Company Inc., a top tier global investment bank and institutional
securities firm, to provided their Advent‘s Geneva® to help in
management of Jefferies‘ growing prime brokerage offerings. Advent
Geneva® now serves eight out of ten of the top prime brokerage
firms worldwide and is innovative beyond competitors as to its global
investment management and accounting platform. Source
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An Explanation | Prime Brokerage Services of Hedge
Funds
One of key functions of prime brokers is to provide
financing to its hedge fund clients, so they can
acquire the leverage needed for their strategies.
Since with leverage can come increased risk, the
prime broker generally determines the degree of
leverage that can be extended to hedge funds using a combination of
stress-testing and value-at-risk, on a portfolio by portfolio (or client by
client) basis. Due to the recent credit crunch, "Leverage is being
closely watched," said Josh Galper, managing principal of Vodia
Group, which advises hedge funds on borrowing strategies. "…the
amount of leverage being utilized is being reviewed much more
carefully than it has been in the past, for obvious reasons." (See
article from MarketWatch)
There are two major methods that a prime broker can lend leverage
to a hedge fund. The first is by providing margin financing; in other
words, the hedge fund borrows some portion of the security's value
from the prime broker. For example, the hedge fund holds a portfolio
with a value of $100, using $25 million of its own assets and $75
million of margin debt provided by the prime broker. This way the
hedge fund achieves a leverage of 4 to 1 (assuming only long
positions), and the prime broker gains interest on the debt.
The alternative way of extending leverage is through the OTC
derivatives. While the structure of this form of financing varies, one
approach takes the form of a managed account swap, and is usually
termed "synthetic prime brokerage". The prime broker sets up an
account advised (or managed) by hedge fund manager who has
trading discretion. So different from the first method, in this case even
though hedge fund manager trades the account to implement the
hedge fund's strategy, the portfolio actually belongs to the prime
broker. The prime broker then enters into a total return swap with the
hedge fund, and charges the interest in the form of a swap payment
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received from the hedge fund.
Through this synthetic prime brokerage service, the leverage used by
the fund is determined by the amount of margin on the swap required
by the prime broker. To follow the example above, the prime broker
has an account with $100 million of its own assets. The account is
advised by the hedge fund manager, where the hedge fund is the
counterparty to a total return swap on that account. As margin for the
swap, the prime broker requires the hedge fund to post $25 million of
equity; thereby providing leverage of 4 to 1.
Many hedge funds use synthetic prime brokerage service as part of a
full service prime brokerage agreement - with equity swaps used side
by side with stock loan and other services for particular parts of their
portfolios, according to an article by HedgeWeek. Source: Hedge
Funds and Prime Brokers
Prime Brokerage Rankings
A quantitative and comprehensive analysis of global prime brokerage
firms was presented in the 2007
Lipper HedgeWorld Prime Brokerage
League Table. The research shows
that the largest prime brokers by total
2006 assets are Morgan Stanley,
Bear Stearns, Goldman Sachs, UBS
and Credit Suisse.
Surveys by Alpha Magazine indicate
that the most important aspect of
service in prime brokers was
operations, followed by client service,
reporting and reporting technology,
securities lending, trade execution and trading technology, financing,
capital introduction and business consulting. Ranking of the prime
brokers in 2007 according to the aforementioned criteria can be found
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on their webpage.
However, after the financial turbulence in the past six months, "there
was likely to be a concentration of prime broking business with a
smaller number of large service providers", said Mehraj Mattoo,
global head of Comas, Commerzbank's fund of hedge funds unit, in
an article by David Walker "How many prime brokers will be left?"
There has also been significant brokerage business flow among the
remaining prime brokers. Hedge funds that account for about 10
percent of Morgan Stanley's prime-brokerage balances withdrew their
money or told the firm they planned to (bloomberg news). Banks that
are taking on new hedge-fund business include JPMorgan (a
spokesman confirmed that the bank has seen a significant jump in
volume and "they are managing it well."), Deutsche Bank, BNP
Paribas, Credit Suisse and Citigroup (more).
Guest post by Yifei Huang
Prime Brokerage Fees
Prime brokers don‘t charge fees for many
of the services they provide to hedge
funds. Instead, profits are usually derived
from three sources: spreads on financing
(including stock loan), commissions from
trading, and fees for the settlement of
transactions done away from the prime
broker. The financing and lending
spreads, which are charged in basis points on the value of client
loans (debit balances), client deposits (credit balances), client short
sales (short balances), and synthetic financing products. Therefore,
clients who take substantial short-selling or major amounts of
leverage are representatives of more lucrative opportunity than
clients who do relatively less short selling and/or use minimal
leverage
For example, it is said, that hedge funds will pay on Wall Street
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record fees next year for brokerage services. This business is
currently dominated by Morgan Stanley, and Goldman Sachs Group
Inc. Sources say that prime-brokerage fees may increase
significantly, by almost a third, to $9US.9-billion in 2009.
Prime Brokerage Conference | Review
Here is a list of prime brokerage related conferences offered in the
past:
IBC's Annual Hedge Fund Administration and Prime Brokerage
Conference
The pdf brochure for the meeting held in Apr 2008 can be
downloaded here
There was a 50-minute panel discussion ("How is the Prime Broker
& Hedge Fund Relationship Evolving?") about the following
topics:
Comments on the existing prime broking scene
What do COO's see as a major problem in the structuring of prime
brokerage
How do prime brokers respond to this
How are prime brokers adapting their business offerings to new
hedge fund strategies
Can one prime broker be all things to all hedge fund managers?
Panellists included Stephen Foster (CREDIT SUISSE) and Todd
Johnson (CITI).
City & Financial: The Future of Prime Brokerage (One Day
Conference)
Offered in 2006(detail) and 2007(detail), both conferences had
Timothy Spangler as the chairman.
The pdf brochure for the 2007 meeting can be downloaded here
Smith Barney Citigroup Financial Services Conference
(annually)
SIFMA's Fixed Income & Derivatives Operations Conference (Oct
2007)
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"Listen to senior operations professionals discuss the significance
of Prime Brokerage services to investors. Hear how Prime
Brokerage has effected the modernization of trading, operations
and technology. Hear what investors needs are with respect to
these services and what dealers can do to meet these needs."
(download pdf file: "Prime Brokerage: The Evolving
Landscape")
by Yifei Huang
BANK PRIME BROKERAGE OFFERINGS
Jefferies Prime Brokerage
Jefferies & Company Inc., is a global investment bank and
institutional securities firm who provides capital market and financial
advice services to its clients. Along with this they provide institutional
brokerage, securities research and asset management. Jefferies is
also a leading provider in equity, high yield, convertible and
international securities, for high net worth investors and investors for
institutions. Source
Linedata Services is a leading global provider of the latest in the
financial technologies market. Recently, Linedata has been selected
by Jefferies & Company‘s Prime Brokerage Unit in order to implement
the use of their Long View trading Order Management System for its
hedge fund clients. This will help to meet the growing demand of the
best financial technology for hedge fund clients within their prime
brokerage unit. Source
Jefferies & Company, Inc, has recently hired Senior professionals;
Robert E. Enslein Jr. and Jeffery M. McCarthy, to join their company
as Senior Vice Presidents. Their job will be to focus on capital
introduction. A third, Robin H. Fink has joined in order to focus on
prime brokerage sales. Source
Jefferies & Company has expanded and is now officially a part of
prime brokerage business. The company has been adding to its staff
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and implementing the talented of its previous affiliate Bank of
America. Some wellknown ones include Penn Miller-Jones, former
Senior Salesman, and John Kunze, prior head of technology to name
a few. These heads will hold similar position in Jefferies heading the
new development of the company. Source
HSBC Prime Brokerage
Last year HSBC Securities Services was
ranked #1 in R&M Fund Accounting and
Administration Survey for a third year in a
row. R&M Surveys being an independent
market research administration that
specializes in investor services industry. The
questionnaire for the survey ranked various providers on 34 aspects
of the services they provide from services such as transaction
processing, to communications, as well as the quality of employees
and the service value for the money. Source
HSBC Holdings Plc. is Europe's biggest bank by market value. It is
now attracting hedge fund businesses because of its focus on the
concerns of prime brokers under the thread of market collapse. The
company is now in cooperative talks with various hedge funds with
more than $100 billion in assets. They are now focused on providing
some services offered by prime brokers to its single-strategy hedge
fund clients. These services would include foreign exchange and
treasury products, in addition to the traditional administration and
custody functions. Source
HSBC Securities Services (HSS) is soon to provide alternative fund
services with in the nation of Australia. They are now offering local
fund accounting, investor servicing and financial reporting to hedge
fund managers, fund of hedge fund managers, and absolute return
fund managers as well as private equity partners. HSS is a part of the
Bank that has grown greatly in recent years and it now has 382 billion
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Australian Dollars in funds under custody as of July 2008. Source
CIBC Prime Brokerage
Some notes and stories related to prime brokerage
services offered by CIBC.
CIBC Mellon Global Securities Services Company is
a leading provider of finance services sizeable
institutions and corporations. They provide services
such as multi currency accounting, securities
lending, information delivery, and exchange services within the nation
of Canada. Recently CIBC Mellon Global Securities Services
announced it reached top rank in the Canadian sub-custody, as
relayed by leading clients from Global Custodian Magazine‘s 2008
Agent Banks. Along with this it has reached first place in both leading
and cross-border clients. Source
CIBC Mellon is jointly owned by Canadian Imperial Bank of
Commerce and The Bank of New York Mellon Corporation. A
superior leader in providing asset servicing, securities lending, and
exchange services in Canada, among other services, CIBC Mellon
recently informed the public of its reappointment by Russell
Investments Canada to provide services for them as well. Being a
fine partner, Russell Investments Group provides a wide variety of
quality investment products. Source
CIBC World Markets is a leader in prime brokerage in Canada. It is a
Canadian provider of Prime Brokerage services for alternative
investment managers. They provide a prime brokerage accounting
and reporting platform for which hedge fund companies and clients
can use with a wide selection or group of services in trade execution,
securities lending, reporting, research, and capital introduction.
Source
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Barclays Prime Brokerage
Here is a collection of stories related to Barclays
Prime Brokerage Services:
Resource #1: (12.1.08) Barclays cut its prime
brokerage staff as it finishes integrating the Lehman business it
acquired.
Barclays snapped up the Lehman unit after Lehman went into
bankruptcy in mid-September.
About 100 people or 30% of the staff in the prime brokerage unit were
let go, according to someone familiar with the matter. The cuts were
across both firms and all roles where there was overlap between
Barclays and Lehman. Some of the staff found other jobs at Barclays
the source said.
Although the cut seems small given the more than 50,000 that Citi
recently said it was laying off, it still adds to the continued exodus of
staff on Wall Street. JPMorgan Chase is planning to lay off about
3,000 people and Goldman Sachs is planning a 10% cut, according
to Bloomberg. source
Resource #2: Barclays has agreed to buy Lehman Brother‘s North
American investment-banking group, including its prime brokerage,
just days after effectively forcing Lehman into bankruptcy.
New York-based Lehman filed for Chapter 11 on Monday after talks
with Barclays about buying the whole of Lehman broke down. But
yesterday, it agreed to pay $250 million for Lehman‘s investment
banking and capital markets operations in North America, which has
about 10,000 employees. Barclays also agreed to pay another $1.5
billion for Lehman‘s Times Square headquarters and two data centers
in New Jersey.
―The proposed acquisition of Lehman Brothers North American
investment banking and capital market operations accelerates the
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execution of our strategy of diversification by geography and
business in pursuit of profitable growth on behalf of our shareholders,
in particular increasing the percentage of Barclays earnings sourced
in North America,‖ Barclays CEO John Varley said.
Barclays will also ―immediately commence discussions‖ about buying
Lehman operations outside of the U.S., Lehman said in a statement.
―This is a wonderful outcome for a great number of our employees
that will preserve and strengthen our terrific franchise,‖ Lehman CEO
Richard Fuld said. Read more here...
Credit Suisse Prime Brokerage Services Notes
Here is a collection of publicly available articles
on Credit Suisse Prime Brokerage Services:
Scores of big hedge funds have been shifting
billions of dollars in prime brokerage business
away from Morgan Stanley and Goldman
Sachs to operations housed in large
commercial banks, in what is being viewed as a massive flight to
safety, write Greg Farrell and Henny Sender in New York .
Traders at JPMorgan Chase, Citigroup, Deutsche Bank and Credit
Suisse are among those who describe themselves as "inundated"
with business from hedge fund managers moving their trading and
execution away from the last two remaining independent investment
banks.
In recent weeks, prime brokerage business had been migrating away
from Lehman Brothers, as the market perception of that firm began to
worsen.
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But after Lehman's collapse into bankruptcy protection on Monday,
along with Merrill Lynch's decision to be acquired by Bank of
America, the gradual ebb of prime brokerage business away from the
independents rose to a flood. Read more...
Morgan Stanley Prime Brokerage
Below are a series of resources related to Morgan
Stanley's Prime Brokerage business:
Resource #1: (11.17.08) Kurt Baker, the head of
Morgan Stanley's prime brokerage in Asia, is
leaving the firm, a company spokesman confirmed
Wednesday, but declined to comment further.
Baker's departure comes a week after Morgan
Stanley confirmed additional worldwide job cuts. It
said it would reduce 10% of its staff in institutional securities, which
includes prime brokerage, as well as 9% in asset management, which
manages mutual funds and other investment instruments.
The firm has already cut about 10% of its work force this year. Since
June 2007, the bank has cut around 4,500 employees, bringing its
total staff to about 46,500 as of Aug. 31, 2008.
Morgan Stanley's prime brokerage, one of the two largest in the Asia,
has been hurt by a worldwide hedge-fund slump.
The hedge-fund industry has been struggling against trailing
performance and a rising tide of redemptions. In Asia, the hedge-fund
industry has been especially vulnerable to a focus on stocks and a
tendency to go long. The Eurekahedge Asian Hedge Fund Index is
down 21.6% so far this year.
Morgan Stanley's prime brokerage operations, in particular, were hit
after Lehman Brothers Holdings Inc. filed for bankruptcy protection in
mid-September. Concerns about the stability of investment banks
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caused some hedge-fund clients to move assets. Source
Resource #2: Stu Hendel will rejoin the Firm as Global Head of
Prime Brokerage. He will be based in New York and report to Rich
Portogallo, Head of the U.S. Equity Division and Global Equity
Financing Services.
In this role, Mr. Hendel, 48, will oversee the Firm‘s global prime
brokerage business focusing on growing Morgan Stanley‘s market
leading franchise and meeting the evolving needs of clients. Mr.
Hendel will also work closely with senior management in the Equities
and Fixed Income divisions on defining and executing strategic
direction for the group.
―We are delighted that Stu Hendel has chosen to return to Morgan
Stanley,‖ said Jerker Johansson, Global Head of Equities and Co-
Head of Institutional Sales and Trading at Morgan Stanley. ―Stu had
been instrumental in helping to build our prime brokerage business
into the recognized market leader today. His experience and skill
make him perfectly suited to continue our momentum in this
business.‖
Mr. Hendel rejoins Morgan Stanley from Eton Park, where he served
as the Chief Operating Officer since that firm was organized in 2004.
―Stu's innovation, content, passion and recent experience at one of
the world‘s most respected alternative investment firms will only
further serve to reinforce our commitment to our clients and our staff,‖
said Rich Portogallo. ―We are thrilled to have him back.‖
Prior to joining Eton Park, Mr. Hendel spent 15 years at Morgan
Stanley. He held a number of senior management positions in Prime
Brokerage from 1993 to 2004, most recently serving as Co-Head of
U.S. Prime Brokerage. Prior to that, Mr. Hendel worked in the legal
division of Morgan Stanley from 1989 to 1993. Mr. Hendel received
his J.D. from Cornell Law School 1983 where he served as business
manager of the Law Review. He graduated from Wesleyan University
in 1980. Mr. Hendel will rejoin Morgan Stanley in early 2007.
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Goldman Sachs Prime Brokerage
Many are now wondering what surprises Morgan
Stanley and Goldman Sachs might have in store
after several other large banks and insurance firms
have fallen. Here's a short story related to this topic:
Resource #1: (11.6.08) Great piece here by the FT
about how Goldman Sachs is booting some of their hedge fund
clients off of their platform. This opens the doors again for
independent or mini prime brokerage shops to pick up the pieces left
behind by larger operations such as Goldman. In the last 9 months
there has been more prime brokerage account closing, creating and
multi-priming than there was over the previous 3 years. Here is the
story excerpt:
Goldman Sachs is cutting back the number of its hedge fund clients
in an indication of tougher market conditions and of the changes
sweeping through what was once the premier investment bank.
"Their ability to leverage themselves has been affected by their new
reiteration," says George Kellner, founder of hedge fund Kellner,
DiLeo. "They are reviewing many of their relationships."
That review is especially intensive for hedge funds pursuing
strategies that involve trading securities that aren't very liquid, such
as convertible bonds, or that rely on the massive use of borrowed
money, such as the computer-driven strategies that seek to profit
from small price discrepancies.
During the bull market, such strategies appeared liquid and borrowing
was cheap. But in recent months, prime brokers raised the cost of
funding and many hedge funds were forced to sell convertible and
junk-rated bonds that dealers can't readily lend. Such securities have
become "dead-end collateral" in Wall Street parlance. Read more...
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Resource #2: The spiraling downward of financial confidence has
sprouted up in various areas. Bloomberg reports that hedge funds
making up ―less than 10%‖ of Morgan Stanley‘s prime brokerage
balance are withdrawing their assets from the firm, or plan to do so.
The article cites ―a person with direct knowledge of the matter.‖ The
article notes that Deutsche Bank AG (DB), Citigroup (C), Credit
Suisse Group AG (CS) and JPMorgan Chase (JPM) ―are picking up
Morgan Stanley‘s clients.‖ The threat to hedge funds‘ assets is real,
the article suggests: Lehman has frozen ―billions‖ in hedge fund
money inside its prime brokerage unit since it filed bankruptcy on
Monday.
Pension funds try and strangle short sales
But some are fighting the good fight, apparently. Dow Jones
Newswires is reporting that the California Public Employees
Retirement System (CALPERS) is ―no longer lending out shares‖ of
Goldman Sachs (GS) and Morgan Stanley (MS), hoping to ―limit
short-selling‖ of the stocks. The wire quotes Clark McKinley, a
CALPERS spokesperson, as saying ―We don‘t want to inadvertently
contribute to the instability of these companies or the market.‖ DJ
notes that Cali‘s teachers pension system yesterday stopped lending
shares of both stocks, and sent a letter to 60 of its fellow pension
funds urging them not to lend. Read more...
Lehman/ Barclays Prime Brokerage Services
Barclays Plc, the U.K.'s third- biggest bank, will
acquire the North American investment-banking
business of bankrupt Lehman Brothers Holdings
Inc. for $1.75 billion, three days after abandoning
plans to buy the entire firm .
Barclays rose as much as 11 percent in London trading after it
agreed to pay $250 million in cash for the Lehman operations and
$1.5 billion for the New York headquarters and two data centers, it
said today in a statement. The London-based bank plans to raise at
least 600 million pounds ($1.1 billion) in a stock sale to help fund the
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deal and may buy other Lehman units.
"The purchase includes the equities and fixed-income sales, trading
and research businesses, commodities and foreign exchange,
merger advisory and prime brokerage units, Barclays said." Read
more...
Lehman Brothers Bankruptcy
BNP Paribas Prime Brokerage
Here is a collection of publicly available
stories on BNP Paribas SA prime
brokerage services:
Resource #1: (11.16.08) BNP Paribas
SA, France's biggest bank, won prime
brokerage business in Asia with hedge
fund CQS (U.K.) LLP as it seeks to lure
clients in the region from rivals.
The new contract with CQS, a London-
based hedge fund manager that has an
office in Hong Kong and oversees about $7.5 billion, adds to BNP
Paribas's existing relationships with major hedge funds in the region,
according to Talbot Stark, global head of BNP Paribas hedge fund
relationships. He declined to name other existing clients.
``We have prime brokerage relationships with three or four of the
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market leaders in Asia that are outperforming their peers and look to
be longer-term survivors in the Asian hedge fund market,'' Stark, 43,
said in a telephone interview yesterday. ``We're in discussions with
several other key players that are making decisions to change their
prime brokerage providers and are seeking alternative providers that
are established and committed to the region.''
Commercial banks such as BNP are seeking to win customers from
established players in the hedge fund market after the collapse of
Lehman Brothers Holdings Inc. and Bear Stearns Cos. rattled
confidence in securities firms. Goldman Sachs Group Inc. and
Morgan Stanley were ranked by a Westborough, Massachusetts-
based Tabb Group LLC report in May as the two biggest prime
brokers worldwide.
Prime brokerages offer hedge funds services such as clearing,
custody, securities lending and financing for assets. They also
introduce fund managers to investors. Source
Resource #2: BNP Paribas SA, France's biggest bank, said it got a
``flood'' of clients at its prime brokerage since Lehman Brothers
Holdings Inc. filed for bankruptcy on Sept. 15.
BNP Paribas expanded its services for hedge funds in June, when it
bought Bank of America Corp.'s prime brokerage unit. The unit
provides record-keeping, securities lending and secured financing to
more than 500 hedge funds and has 320 employees, the company
said.
``That acquisition now looks timely in these markets as people are in
the middle of a flight to quality,'' said Talbot Stark, global head of BNP
Paribas hedge fund relationships, in an interview today. ``Foremost
on people's minds is ensuring that wherever they decide to put
assets, they will be secure.''
Lehman won't return ``billions'' of frozen prime-brokerage assets ``in
the short term,'' Stephen Pearson, a partner at
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PricewaterhouseCoopers, administrator for the Lehman bankruptcy,
said yesterday. GLG Partners Inc., the $24 billion hedge fund that
started as a unit of Lehman 13 years ago, this week said some
``residual'' trades with Lehman didn't clear before it filed the biggest
bankruptcy in history.
While Stark wouldn't specify how much money hedge funds have
moved to BNP Paribas, he said the company is now taking only 24
hours to sign complex prime brokerage agreements that used to take
as long as three months to negotiate. Read more...
Resource #3:
The FINANCIAL -- BNP Paribas is pleased to announce it has
completed the acquisition of Bank of America's equity prime
brokerage business.
The equity prime brokerage business provides a wide range of
services to hedge funds and mutual funds. We believe it is a low risk,
low capital consumption, service oriented business.
The deal, announced on June 10 of this year, brings more than 500
clients and over 300 employees to BNP Paribas Corporate and
Investment Banking. The transaction involves the transfer of client
relationships, employees and technology systems.
Yann Gerardin, Global Head of Equity and Commodity Derivatives,
said: ―The strategic fit of this acquisition is excellent. Combining the
Bank of America prime brokerage business with our global platform
and leading derivatives business creates a prime brokerage business
of choice. It is an important advantage for clients to partner with a
bank like BNP Paribas , with a AA+ credit rating and global reach‖.
Todd Steinberg, Head of Equity and Commodity Derivatives for the
Americas, said: ―We are thrilled the deal has closed on schedule. Our
goal was to move the business over seamlessly for clients and
employees and we have achieved this. ―
Chase Prime Brokerage
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Here is a collection of publicly available articles related to Chase
prime brokerage:
Scores of big hedge funds have been shifting billions of dollars in
prime brokerage business away from Morgan Stanley and Goldman
Sachs to operations housed in large commercial banks, in what is
being viewed as a massive flight to safety, write Greg Farrell and
Henny Sender in New York .
Traders at JPMorgan Chase, Citigroup, Deutsche Bank and Credit
Suisse are among those who describe themselves as "inundated"
with business from hedge fund managers moving their trading and
execution away from the last two remaining independent investment
banks.
In recent weeks, prime brokerage business had been migrating away
from Lehman Brothers, as the market perception of that firm began to
worsen.
But after Lehman's collapse into bankruptcy protection on Monday,
along with Merrill Lynch's decision to be acquired by Bank of
America, the gradual ebb of prime brokerage business away from the
independents rose to a flood.
APG, manager of Europe's biggest pension fund, said: "We have
stopped stock lending in several American, but also European, banks
whose shares face the most downward pressure, among others, from
short-sellers." Read more...
Permanent Link: Chase Prime Brokerage
Citigroup Prime Brokerage
Here is a collection of publicly available articles related to
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Citigroup prime brokerage:
Resource #1 (2.4.09) Citigroup's Andrew Hill, who currently co-
heads the firms prime brokerage sales business in Japan, is being
relocated to Singapore, a Citigroup spokesperson confirmed to IDD.
In his new role, Hill will work towards building the roster of hedge fund
clients in Southeast Asia and India. He will also oversee Citi's US
prime brokerage business, and will continue to oversee prime finance
sales for Japan.
Hill's specific focus will be on equity and fixed income prime
brokerage. He will work alongside Alex Knight, who oversees the
foreign exchange prime brokerage business for Citi in Asia. source
Resource #2: (12.6.08) Citigroup has reportedly cut 15% of its Citi
Prime Finance staff, including 14 members of its New York office.
Five of those took severance packages; the rest were laid off.
As part of the downsizing, Citi‘s prime brokerage group will no longer
offer business consultancy services to hedge funds, Hedge Fund
Alert reports. It remains committed to other services including
clearing, securities lending, capital introduction and execution. source
Resource #3: Scores of big hedge funds have been shifting billions
of dollars in prime brokerage business away from Morgan Stanley
and Goldman Sachs to operations housed in large commercial banks,
in what is being viewed as a massive flight to safety, write Greg
Farrell and Henny Sender in New York .
Traders at JPMorgan Chase, Citigroup, Deutsche Bank and Credit
Suisse are among those who describe themselves as "inundated"
with business from hedge fund managers moving their trading and
execution away from the last two remaining independent investment
banks.
In recent weeks, prime brokerage business had been migrating away
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from Lehman Brothers, as the market perception of that firm began to
worsen.
But after Lehman's collapse into bankruptcy protection on Monday,
along with Merrill Lynch's decision to be acquired by Bank of
America, the gradual ebb of prime brokerage business away from the
independents rose to a flood.
APG, manager of Europe's biggest pension fund, said: "We have
stopped stock lending in several American, but also European, banks
whose shares face the most downward pressure, among others, from
short-sellers." Read more...
Deutsche Prime Brokerage
Here is a collection of articles related to Deutsche Bank Prime
Brokerage Services:
Scores of big hedge funds have been shifting billions of dollars in
prime brokerage business away from Morgan Stanley and Goldman
Sachs to operations housed in large commercial banks, in what is
being viewed as a massive flight to safety, write Greg Farrell and
Henny Sender in New York .
Traders at JPMorgan Chase, Citigroup, Deutsche Bank and Credit
Suisse are among those who describe themselves as "inundated"
with business from hedge fund managers moving their trading and
execution away from the last two remaining independent investment
banks.
In recent weeks, prime brokerage business had been migrating away
from Lehman Brothers, as the market perception of that firm began to
worsen.
But after Lehman's collapse into bankruptcy protection on Monday,
along with Merrill Lynch's decision to be acquired by Bank of
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America, the gradual ebb of prime brokerage business away from the
independents rose to a flood.
APG, manager of Europe's biggest pension fund, said: "We have
stopped stock lending in several American, but also European, banks
whose shares face the most downward pressure, among others, from
short-sellers." Read more...
Permanent Link: Deutsche Bank DB Prime Brokerage
Banc (Bank) of America Prime Brokerage
French financial services provider BNP Paribas has completed the
acquisition of Bank of America's equity prime brokerage business,
which provides services to hedge funds and mutual funds.
The deal, announced on June 10, 2008, brings more than 500 clients
and over 300 employees to BNP Paribas corporate and investment
banking. The transaction also involves the transfer of client
relationships, employees and technology systems.
Yann Gerardin, global head of equity and commodity derivatives at
BNP Paribas, said: "The strategic fit of this acquisition is excellent.
Combining the Bank of America prime brokerage business with our
global platform and leading derivatives business creates a prime
brokerage business of choice. It is an important advantage for clients
to partner with a bank like BNP Paribas, with an AA+ credit rating and
global reach." Source
Press@TriadSecurities.com
INDUSTRY TERMS AND DEFINITIONS
Derivatives Prime Brokerage
Prime brokerage clients often benefit from increased capital efficiency
through margin netting of entire portfolios. Consolidated collateral
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payment and one consistent valuation source provide operational
efficiencies. Credit derivatives prime brokerage offers the capability to
trade directly or on give-up across single name, index and correlation
products-in all regions. The interest rate derivatives prime brokerage
infrastructure allows clients to trade swap and derivative structures in
many currencies.
Prime Brokerage Client Service
With 24-hour global teams in place, clients benefit from the support
and insight of experienced teams who provide innovative solutions
based on an in-depth understanding of clients' objectives, operations,
technology, data and accounting management. An experienced
onboarder leads clients through the integration phase and directs a
team of documentation, technology and operational professionals.
And with a single point of contact and the full back up of a dedicated
team, they deliver the highest level of service.
Hedge Fund Hotels
Certain prime brokers lease commercial real estate, and then
sublease blocks of space to hedge fund tenants. These prime brokers
typically provide a suite of on-site services for clients who utilize their
space.
Space for Hedge Funds
Operational Support
Operational Support for Hedge Funds
Prime brokers act as a hedge fund's primary operations contact with
all other broker dealers.
Global Custody Prime Brokerage Term
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This service includes clearing, custody, and asset servicing
Prime Brokerage Research Services Definition
Prime brokers provide clients with timely daily morning research
filtered for what they want from over various sources. The clients
benefit by receiving access to conferences and research reports from
institutions with which the prime brokers have relationships. The
clients also benefit from receiving timely information throughout the
day on securities and sectors of interest.
Real Time P & L
Through many prime brokerage technology systems, clients are able
to enter trades as they are executed throughout the day as well as
view resulting position and profit and loss changes in real-time. The
application also pulls analytics from third party systems.
Performance Analytics
Risk Exposure, risk exposure management, management of risk
exposure, risk exposure services by prime brokerage firms for hedge
fund managers or hedge funds
Risk Exposure
Prime Brokerage firms provide clients with the flexibility required to
manage overall risk exposure. Their system has the capacity to
perform multiple customized and ad hoc analyses, including VaR,
stress tests, sensitivities to multiple risk factors and ―on-the-fly‖ risk
analyses of new portfolios. Data extracts and hardcopy reports,
including those that demonstrate transparency to investors, feed
directly into client systems.
Portfolio Analytics
Prime brokers offer a comprehensive suite of applications to measure
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risk, performance and P&L.
Hedge Fund Consulting
Prime brokerage firms often offer a range of consulting / advisory
services, typically provided to "start-up" hedge funds, and focused on
issues associated with regulatory establishment requirements in the
jurisdiction where the hedge fund manager will be resident, as well as
in the jurisdiction(s) where the fund itself will be domiciled, provide
comprehensive business and technology consulting services for
hedge funds of varying size and strategy. Recognizing the challenges
associated with building an institutional funds management business,
they constantly research new technologies and hedge fund services
to provide effective solutions for their clients.
Customized Technology & Reporting
They provide hedge fund managers with portfolio reporting needed to
effectively manage money. They provide robust, leading edge
technology to meet the ever-changing needs of the clients. Through
continued investment in technology, they provide clients with
customized data delivery and reporting as well as end-to-end
workflow solutions to deliver straight-through processing.
This includes the following:
An exhaustive set of financial reports including trades, positions,
cash statements, flows, maturing deals, stock lending, risk
exposure, corporate actions.
A consolidated view of entire portfolio, gathering on the same
reports cash, listed or OTC derivatives, for both equity and fixed
income products, and including hybrid and structured
instruments.
A web-based solution, customizable to fit personal needs preset the
user profile and choose their own daily set of reports, or filters,
and the format of files.
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Financing of Trades and Positions
Prime brokers offer an effective framework to facilitate funding needs
at highly competitive rates. They work closely with clients to better
understand their financing needs and deliver tailored solutions.
Financing facilitates leverage of client assets.
Risk Management Advisory Services
The provision of risk analytic technology, sometimes supplemented
by consulting by senior risk professionals. This includes Portfolio Risk
Margining .They offer risk management expertise to tailor various
margining methodologies to best suit clients' investment strategies
and risk intolerance. As prime brokers, they can view a client's entire
prime brokerage portfolio and optimize utilization of margin by
recognizing off-setting positions to help manage risk. The capital
efficiency gained allows clients to further enhance their investment
returns
Securities Lending Term Definition
An important part of prime brokerage services is the ability of the
prime broker to source stock in order to satisfy the short selling
requirements of the fund. Many arbitrage strategies are dependent for
their success on being able to source stock loan. The quality and
depth of the stock lending service is therefore a key differentiating
factor between prime brokers. They have access to hard-to-borrow
securities
Capital Introduction Term Definition
A process whereby the prime broker attempts to introduce its hedge
fund clients to qualified hedge fund investors who have an interest in
exploring new opportunities to make hedge fund investments.
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Additional Prime Brokerage Resources
Below please find a collection of miscellaneous prime brokerage
articles, resources and videos:
Prime Brokerage Sales
What is Prime Brokerage?
Prime Brokerage Business
Prime Brokers Association
Prime Brokerage New York
Lehman Prime Brokerage
Unit Sold
Asian Prime Broker Growth
Prime Brokerage Book
Prime Brokerage Service
Capital Introductions
Prime Brokerage Technology
Prime Brokerage Clearance
Services
Capital Introduction Services
Prime Brokerage Services
Prime Brokerage Consulting
Prime Brokers
Prime Brokerage Financing &
Equity Services
Prime Brokerage Clearance
Services
San Francisco Hedge Fund
Event
Hedge Fund Transparency
Act
Prime Brokerage Settlement
Hedge Fund Risk
Management
Where are Prime Brokers
Located
Capital Introduction Services
for Funds
Capital Introduction Team
Prime Brokerage Products &
Services Q & A
Research Services for Hedge
Funds
Prime Brokerage Business
Information
Independent Fund
Administration Firms
Hedge Fund Ethics | Code of
Ethics
Prime Broker Market Share &
Clients
Prime Brokerage For Small
Hedge Funds
Hedge Fund Pitch Book |
Marketing
Hedge Fund Service Provider
Branding & PR
List of Hedge Funds |
Directory of Contacts
Lehman Brothers Bankruptcy
and Hedge Fund Prime
Brokerage
GLG Partners Exposure to
Lehman Brothers
Prime Brokerage Changes |
Evolving Industry
Lehman Bankruptcy Victims
List
Prime Brokerage Fees
Prime Brokerage Mergers &
Acquisitions
The Prime Brokerage Book
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 116
Margin Calls | Risk of Margin
Calls with Frozen
Accounts
Hedge Fund Training Course
Future of Prime Brokerage
Industry
Prime Brokerage Leverage
Hedge Fund Blog
Prime Brokerage Software
Asian Hedge Funds & Prime
Brokerage Services
Prime Brokerage Sales
Low Stock Market Trading
Volumes
Prime Brokerage OTC
Derivative Arrangements
Prime Brokerage Accounts
Flowing in New Directions
Interactive Brokers Trading
Platform
Financial Clearing and
Execution Services from
Prime Brokerage
Services
Top 3 Prime Brokerage
Trends
Switch Prime Brokerage
Firms
Capital Introduction Definition
Derivatives Prime Brokerage
Precious Metals and Foreign
Exchange Services
Prime Brokerage Client
Service
Hedge Fund Hotels
Hedge Fund Operational
Support
Prime Brokerage Global
Custody
Research Services for Hedge
Funds
P & L - Term Definition
Performance Analytics
Risk Exposure Management
Portfolio Analytics Term
Definition
Customized Technology &
Reporting
Financing of Trades Term
Definition
Risk Management Advisory
Services
Securities Lending Term
Definition
Saratoga Prime Services
List of Prime Brokerage
Services
Prime Brokerage Regulations
Prime Brokerage & Hedge
Funds
Prime Brokerage & Hedge
Fund Lawsuits
Prime Brokerage
Prime Broker List | List of
Prime Brokers
Prime Brokerage Industry |
PowerPoint Overview
Gating Clauses and Lock Up
Periods
Prime Brokerage Agreement |
Contract Example
Not a Hedge Fund | No Prime
Brokerage Services
Prime Brokerage Business |
Wikipedia
The Prime Brokerage Book
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 117
Counterparty Risk
Management
Top 3 Technology Trends for
Hedge Funds
Adding a Second Prime
Broker
Prime Brokerage Training |
Top Resources
Prime Brokerage News
Hedge Fund Manager Profiles
Precious Metals and Foreign
Exchange Services
Investment Conferences,
Events & Seminars
Prime Brokerage Conference
Hedge Fund Business
Consulting
Risk Management Advisory
Services
Prime Brokerage Trends
Below please find all of the PrimeBrokerageGuide.com articles on
industry trends, facts, statistics and surveys:
Prime Brokerage Rankings
Asian Prime Broker Growth
Prime Brokerage Sales Trend
New Prime Brokerage Model Emerging
Prime Brokerage Trends Article
Prime Broker Survey Results
Prime Brokerage & Hedge Fund Administration
Prime Brokerage for Small Funds
Prime Brokerage Assets
The Prime Brokerage Book
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 118
Additional Websites & Resources
http://PrimeBrokerageAssociation.org | Networking
http://PrimeBrokerageGuide.com | Prime Brokerage Guide
http://PrimeBrokerageBook.com | Prime Brokerage Book
Http://HedgeFundCertification.com | Certification & Training
http://FamilyOfficesGroup.com | Family Offices
http://HedgFundsCareer.com | Career Guidance
http://PrivateEquityBlogger.com | Private Equity