New to the hedge fund and Prime Brokerage world? Here is some basic information to get you started.
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What is Prime Brokerage?
Prime brokerage is the name given to a bundle of services offered by investment banks and securities firms to professional investors, and more specifically hedge funds. Prime brokers provide a centralized clearing facility for the trading activities of hedge funds. Prime brokers give hedge funds one source to see long and short cash, stock, and other securities positions and netted collateral requirements across all deals.
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Prime Brokerage Fees
Prime brokers offer their services in exchange for charging commissions on securities transactions and earning spreads on financing the long and short cash and security positions.
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Services
Prime brokerage clients will have varying technological needs relating to their specific portfolios. Some clients might simply need a daily portfolio statement, while other clients require real-time portfolio reporting. Large technological advances have streamlined the process of real-time reporting, but certain securities may still prove difficult report on a real-time basis. The following list includes services that are typically bundled in to the Prime Brokerage package:- Custody - clearing transactions, custodying assets, and asset servicing
- Securities Lending - providing customers with the ability to take short position securities
- Financing - providing leverage to asset managers
- Operational Support - the prime broker often acts as a liaison between its clients and other broker/dealers
In addition, prime brokers may provide "value-added" services, which may include:- Capital Introduction - making investor introductions to the asset manager
- Customized Technology - certain prime brokers will provide fund managers with technology platforms to facilitate trading, reporting, and/or risk management
- Office Space - many prime brokers will provide clients with office space and, in some situations, on-site services
- Consulting Services - prime brokers may provide a wide array of consulting services, including helping new managers launch their funds or risk management advisory.
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History
The concept of "Prime Brokerage" is generally credited to Furman Selz, a US broker/dealer, around the late 1970's. Before Prime Brokerage, fund managers had to aggregate all their own securities positions with multiple broker/dealers, a time-consuming process. Prime brokerage was quickly adopted by the bulge bracket firms like Goldman Sachs and Merrill Lynch, but in its early years, hedge funds were much smaller than today's hedge fund clientele.
In the 1980's and 1990's, as the hedge fund industry grew, Prime Brokerage became big business for investment banks, and the competition for hedge fund clientele was fierce. As technology improved, Prime Brokerage reporting became increasingly efficient. Initially, reporting was done over the phone or by messenger, later by fax, and eventually through the internet. By 2006, some of the larger investment banks were reporting billions of dollars in revenue attributed solely to their Prime Brokerage divisions.
The financial meltdown in 2007 led to the direct failure of some of the bulge bracket investment banks, which trickled down to their hedge fund clients. Suddenly, counterparty risk became the key topic in the discussion of Prime Brokerage, and fund managers looked for solvency as another key aspect in choosing a prime broker.
