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

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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.

The Prime Brokerage Book

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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.

The Prime Brokerage Book

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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