Prime Brokerage

The Prime Brokerage BookBelieve 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 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 [email protected]. PrimeBrokerageGuide.com PrimebrokerageAssociation.org 2 The Prime Brokerage Book 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. PrimeBrokerageGuide.com PrimebrokerageAssociation.org 3 The Prime Brokerage Book 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... PrimeBrokerageGuide.com PrimebrokerageAssociation.org 4 The Prime Brokerage Book 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 PrimeBrokerageGuide.com PrimebrokerageAssociation.org 5 The Prime Brokerage Book 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 recordkeeping 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 PrimeBrokerageGuide.com PrimebrokerageAssociation.org 6 Prime Brokerage OTC Derivative Arrangements (http://PrimeBrokerageGuide. 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 .com PrimebrokerageAssociation.quickly.org 7 . 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.and for many more it will probably occur before the beginning of Q3 of 2009.000 emails from professionals who have came and visited our websites.The Prime Brokerage Book Over the last 12 months our team has received around 100. Funds ranging in size from $25M to $2. Many of these emails are in regards to accessing particular resources to help in career or potential client searches. Houston & State of Texas If you have been directed to this post via email we apologize for the less than personal response. These contain contact details for various funds and may be instantly downloaded. For many hedge funds these changes are happening right now .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. please email us again if you have any further questions or concerns. Below please find various state-by-state hedge fund manager contact lists available for under $100 each. ‗Give up arrangements‘ are where the executing broker writes trade tickets 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. The Prime Brokerage Book on behalf of both counterparties to the trade – provided hedge funds with three advantages: easier post-trade operations.org 8 . 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. CEO of GlobeOp Financial Services commented. Here is the WSJ article excerpt: Brokerage firms are reducing financing and other services to hundreds of hedge funds. Under financial pressure. source PrimeBrokerageGuide. which they deem too small (under $200M) or exotic. risk management and balance sheet clean up projects. ―Challenged by investors to provide increasing levels of transparency." Hans Hufschmid. funds would also have to find the operational bandwidth and capability to efficiently manage the complexities of OTC trade processing involving multiple instruments. in a move that could accelerate the shakeout among these heavy-hitting investors. independent validation and reporting frequency. cross margining and credit intermediation. find other financing at higher cost or close. "And the February 28 deadline after which major dealers will not accept novation consents by email looms. 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. The result is that more funds may have to merge. high volumes and multiple counterparties.com PrimebrokerageAssociation. 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.‖ 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. This is due to necessary cost cutting. Bear Stearns. 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. Protecting the brand of your own hedge fund or private equity fund is more important than ever. this could be just as important to have in place as a disaster recovery system. This is due to Lehman Brothers. Rumors of gating clauses being enacted or redemption requests spiking within a single fund can spread around the world in less than 3 days.org 9 . 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.com PrimebrokerageAssociation. False rumors can cause investors to act irrationally and began to question the quality of a fund‘s team or operations. Some hedge funds in London had 100% of their assets frozen within Lehman‘s custody services. PrimeBrokerageGuide. Madoff and others. 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. In each of these cases the common thread was the creation of or fault of un-reliable or unstable service providers. 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.The Prime Brokerage Book 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. 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. your experiences and pedigree.  Work with high caliber service providers so that you don‘t bring extra skepticism upon a relatively new fund. investment process and risk management controls and how they all interact inside the operations of your hedge fund. it is an iterative constantly evolving project which will never be complete. My advise to both $30M and $1M hedge funds is that you can never start this process early enough. This should be the foundation upon which everything else is built.  Think long-term. which may already be scrutinized by potential investors and advisors. Here are the top 10 tips for creating your hedge fund marketing materials.  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.  Do not send any pitch book or marketing material out before speaking with a qualified compliance or legal counsel on your team.  Use your whole team and prime brokerage business partners and other service providers to improve your marketing materials.The Prime Brokerage Book 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.  Create a one page marketing sheet. Professionals who work in prime brokerage or administration see many types of marketing materials and can help provide valuable feedback at no PrimeBrokerageGuide.org 10 .com PrimebrokerageAssociation.  Stress the importance and individual functions of your team. 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. Your advantage must be unique. and also created a unique set of opportunities for a small subset of traders and portfolio managers within the industry. simple and professional layout for the presentation and use the new Windows Vista diagramming tools to create institutional quality presentation. choose a unique. Blood On The Hedge Fund Streets While the economic conditions have shut down many funds.The Prime Brokerage Book additional cost to your fund. Coming into a meeting with a word document or 25 pages of bullet points is not very effective. 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. but this is the exception. historically low asset prices. PrimeBrokerageGuide. I believe these figures will be high and will spur even more startup activity as others move to seize the current market opportunities. 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. In Q1 2009 there are hundreds of New York and London based hedge funds being started to take advantage of high volatility.com PrimebrokerageAssociation.  Purchase the rights to graphics. exposed fraudulent activity. The hedge fund and private equity industries are as entrepreneurial as ever. and relatively cheap talent hungry for a fresh start. and we will be able to see how many funds have been started around the world. you don‘t want to lose them due to the aesthetics of your PowerPoint.org 11 . There are some institutional money managers who run 3 similar funds and will sometimes cover each of these within a single presentation.  Do not create a PowerPoint presentation that is longer than 30 pages. It is hard enough to catch an investors‘ attention and bring them to the table to discuss your fund. mergers within the industry. and widespread failures and redemption notices of hedge funds themselves. To read the full newsletter. 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. It was seen in the same light as a major economic superpower defaulting on its own investment notes. 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. along with increasingly frequent reports of hedge fund fraud. 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. 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 poor market and overall industry performance. A few firms have reported shutting down due to assets being locked up within Lehman Brothers when they collapsed earlier this year.The Prime Brokerage Book Prime Brokerage Trends Article | TAAA About 7 weeks ago I wrote up a small article for the TAAAPs newsletter. please click here. A mitigating factor PrimeBrokerageGuide. Lehman failed and many investment banks struggled or sold off their prime brokerage services to other firms. which are often referred to as third party marketers. The top three trends affecting the prime brokerage industry right now are multi-prime brokerage relationships. Prime brokerage firms are not as heavily affected by this as would most independent hedge fund marketers.org 12 . limiting capital introduction services. and prime brokers acting as business partners to hedge fund managers. In 2008 everything changed. Anyone offering capital introduction services lately has faced the increased challenges of investors sitting on cash.com PrimebrokerageAssociation. In the past this was almost thought of as unnecessary as no large investment banks offering prime services had collapsed. "Madoff was providing those numbers. "From where I sit in the fund-of-funds side." Even though some of the underlying funds had third-party fund administrators. offering business plan and marketing plan startup tools.. The third major trend affecting the prime brokerage business is that more firms in the space are positioning themselves as business partners. 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." says Rich Koppel.. Prime brokerage firms are now publishing white papers. 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. New York and Hong Kong. and holding workshops and networking events to help hedge fund managers connect with additional business partners and investors. even the thirdparty administrators appear to have accepted Madoff's numbers... managing director at youDevise Ltd. a supplier of hedge fund technology that has offices in London. 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.com PrimebrokerageAssociation. Infinity Capital's Vale speculates that the feeder funds "depended on the numbers that [Madoff's] underlying funds provided." . I've looked at [Madoff's] return stream several times and rejected it [based] on my gut.you have to check all the boxes." Vale adds.. This is due to the commoditized nature of the industry and high level of competition for new business.org 13 . Nobody dug a little bit deeper to see that PrimeBrokerageGuide. "It's checks and balances -.The Prime Brokerage Book being that prime brokers often take on and attempt to service more clients. use that tactic. "The major red flags were to do with predominantly back-office issues. PrimeBrokerageGuide. read the full article Prime Broker Market Share Changes Below is a short article on how the market share between prime brokers is changing. [in which] the broker is the sole source of the quote [aka. 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. "That's a deal killer for us." adds James Freeman. according to Nick Roe... the new landscape offers a broad range of opportunities for the coming years.along with that of its hedge fund clients ." he warns." says Freeman. . but a [bad] back-office business structure can lose you all of it. senior relationship manager at Key Asset Management.The Prime Brokerage Book those numbers were just coming from in-house. "There was no third-party firm at all looking at the numbers to verify even if they were real or correct.transformed by the ongoing credit crisis and grisly economic backdrop." Vale continues. Here is the article excerpt: The collapse of Lehman Brothers last September was the flashpoint of a year that saw the prime brokerage world .com PrimebrokerageAssociation. "All the major classic frauds -. net asset value] and it's not being reconciled by a thirdparty administrator.org 14 ." Vale claims. a London-based fund of funds manager with $2 billion in assets invested in 90 underlying hedge funds. to send out false information because there is no record of it and you have no independent validation if the information is correct.Beacon Hill Asset Management and the Manhattan Fund -.. But for those funds and brokers that come through the turbulence intact. the London-based head of prime finance at Citi. "A bad investment process can lose you lots of money.". 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.com PrimebrokerageAssociation. but no agreement on what the "right" answer is. and even scheduled life-spans are often drastically different from one fund to the next. Roe argues that just as important was the spotlight turned on rehypothecation .The Prime Brokerage Book While the hedge fund assets that were locked up in London after Lehman Brothers International (Europe) went into administration garnered headlines for a while.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. with prime brokers forced into much more transparency.' 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.org 15 . Here is the article on hedge fund ethics: Hedge funds took a battering 2008 . 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: PrimeBrokerageGuide.' he says. 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. 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.the use by prime brokers of hedge fund assets as collateral for the borrowing they need to provide funding to those clients. their operations. 'But it won't go away. Just this morning I found an interesting article on hedge fund ethics. 'I believe the regulations regarding rehypothecation will change. investments. retire. The second question is whether to allow investors to take money out of the hedge fund. Here it is: PrimeBrokerageGuide. switch to a new 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.com PrimebrokerageAssociation. 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.The Prime Brokerage Book a) stay with the fund until you have recouped the losses and made your investors whole . but maybe the second case makes sense if you can't climb back out from that fund. Again hedge funds are not acting consistently. In the first case there's a moral high ground to climbing back out and keeping your commitments to your investors.org 16 .working for "psychic income" as Kenneth Griffin of Citadel fame told the New York Times or b) leave . 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.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. 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. One of your investors wants to pull his money out . com PrimebrokerageAssociation.The Prime Brokerage Book Prime brokers provide trading and financing services to hedge funds. It also earns money by hypothecating the portfolios of the hedge funds it services. any help would be appreciated. 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. 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.org 17 . 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. 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. This service is popular with hedge fund managers and can lead to new business for the prime brokerage firm. Capital Introduction Q & A Question: What are capital introductions services? Should our firm be using them? We are based in Miami. 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. My background is in capital raising and I am now associated with a prime brokerage firm which offers capital introduction services. Some prime brokers will offer a physical capital introduction service arranging meetings and events where the managers are able to meet investors. Where are Prime Brokers Located? PrimeBrokerageGuide. org 18 . 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. It begins by describing PrimeBrokerageGuide. and the doubts surrounding the leading primes have accelerated the demise of the already faltering single prime brokerage model. I was also surprised that Asian countries didn‘t break 2-4% of this list. This guide explores the different options available to a single primed fund that is making the leap to multi-prime. 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. Germany and France numbers to be surprising.The Prime Brokerage Book Question: I am looking to work with a local prime brokerage firm. These statistics were taken from the recently published 2009 Preqin Global Hedge Fund Investor Book. 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. the bankruptcy of Lehman Brothers leaving $65 Billion in frozen hedge funds assets. Perhaps this has to do with regulations and fund structures and terms used within that area of the world. A Guide to Overcoming the Operational Challenge of Multi-Prime Brokerage Introduction The ongoing market turmoil.com PrimebrokerageAssociation. the portfolio manager. This cost. and transaction information. 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. 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. 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. views and reports. which allows the fund to understand key measures such as P&L. performance. global securities. across multiple primes.An effective allocation process ensures that the PMS has the ability to 'slice and dice' views and reports in a manner that is PrimeBrokerageGuide. At the heart of all multi-prime solutions is the portfolio management system (PMS). exposures and risk. the middle and back-office must now be capable of handling multi-currency. Additionally. the COO. which is in the form of operational complexity and the need to acquire middle and back-office functionality. 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. Operations and indeed ultimately external investors. accurate and timely data. all across multiple timezones.The Prime Brokerage Book the nature of the operational challenge. 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 CFO. Once the data are captured and reconciled the fund must then be able to present the data in real-time and historical. then weighs the pros and cons of today's multi-prime solutions. At the very core of this complexity is the requirement to collect and aggregate the disparate cash.com PrimebrokerageAssociation. and derivatives. and concludes with a recommendation. The 3 Building Blocks of a Multi-Prime Solution 1 . Likely users include the trader. the compliance officer.org 19 .Allocation . position. had been borne by the prime in the single prime model. At the highest level it involves a process of identifying and categorizing trades down to the tax-lot level. To further complicate the process. such as the primes or the fund administrator.org 20 . PrimeBrokerageGuide. XML. fund administrators. -Reconciliation (and Exception Processing) . It is vital that the OMS and PMS share the same allocation methodology or the reporting flexibility of the PMS will be compromised. In addition. SWIFT and increasingly FIX are prerequisites for any modern solution. Ideally the process is automated and ensures that differences or exceptions between the various parties are discovered and corrected as soon as possible. It is imperative that the solution can send and receive the file formats demanded by primes. 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.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. Once these positions have been correctly categorized it becomes possible for the PMS to generate reports based on these categories. a security master that includes independent corporate action verification will serve as a check and balance to the primes‘ corporate action reporting. Formats such as flat-file. The security master ensures that data across multiple primes is normalized so as to allow seamless integration. Once these errors are discovered the PMS should have the ability to unwind the error in a one-step process.The Prime Brokerage Book sufficiently flexible to meet the information needs of the particular end user. 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. Allocation is usually handled by an Order Management System (OMS). a robust security master must be at the core of the data capture process. An example would be a CFO who would like to understand the P&L attributed to a particular portfolio manager. executing brokers and market data vendors. More sophisticated allocation methods allow for a layered approach so that reporting can be multi-leveled.The subject of data capture becomes particularly important in a multi-prime environment. .Data Capture .com PrimebrokerageAssociation. who is associated with a specific strategy within a particular fund. 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. Many legacy systems struggle with this real-time requirement because their architecture pre-dates the widespread adoption of the FIX protocol. (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 PrimeBrokerageGuide. and is critical in a multi-prime environment. 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. It is no surprise that the evolution of the PMS has mirrored (and in many cases lagged) the evolution of the hedge fund industry. Only a PMS built around a FIX engine can offer data that is updated both tick-by-tick and execution-by-execution. with varying levels of success. 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. is the requirement for true real-time views of data. multi-market and multiasset class.org 21 . Alpha has become increasingly fleeting in nature and funds now must be able to respond instantly to changing market conditions. Funds today require a real-time understanding of their strategies' performance and risk. The first hedge fund PMSs that emerged 20 years ago were essentially re-purposed vendor solutions from the long-only asset management industry.The Prime Brokerage Book 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. the biggest demand placed on the PMS by this new complex multi-prime world. As funds push beyond domestic long/short equity strategies these same vendors have responded. by grafting on the functionality required to support multi-currency.com PrimebrokerageAssociation. and the demand that legacy systems most struggle with. This is particularly true in light of today's market volatility. Arguably. They continue to receive their familiar reports but now including an aggregated view of all their relationships. Not much changes for the hedge fund."Hearsay Reporting" . Third. hearsay is a very manual process and is only as good as the data received. from the hedge fund's perspective. Hedge funds that do not have the financial and human resources. funds typically face a tough trade-off. which at its most basic level involves a choice between cost and control. not many primes are willing to play the role of "the prime of primes". hearsay does not sufficiently reduce a firm's dependence on a single prime.com PrimebrokerageAssociation. Prime Broker (Outsourced) .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. Factor in the possible resentment of the prime offering the service it is not surprising if accuracy suffers. The advantage to this approach.A subcategory of the Prime Brokerage industry is a PrimeBrokerageGuide. In choosing one of these solutions. 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. as the fund adds more and more primes the original prime will find it less compelling to offer the service. 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. First. There are. Finally.The Prime Brokerage Book Various industry players have sought to offer a solution to the operational burden of multi-prime. Mini-Prime Broker . a number of significant drawbacks to this approach. and are willing to live with less control typically choose a less costly outsourced solution. is that the original prime shoulders all the operational complexity of going multiprime.org 22 . Additionally. Second. Funds that have more resources and demand complete control of their data take the time and expense to buildout an onsite system. Let's look at the four most popular solutions available today. however. Any problems associated with the prime offering the hearsay reporting will mean that the fund will have to scramble to replace their reporting infrastructure. this solution only goes part of the way to solving the reporting problem. Finally. To date. Their value proposition has been around better service at lower cost for the little guy. traditionally the admin is responsible for aggregating all of a fund‘s activities to produce monthly financial statements and NAV calculations. This is particularly true for firms that relied heavily on Excel to augment the reporting capabilities offered by their original single prime. many fund admins have moved in the direction of offering outsourced middle and back office services. 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. however.The fund admin would appear to be the obvious candidate to provide a multi-prime aggregation service. The typical complaint is that the reporting provided by the admin is just not flexible or timely enough for many hedge funds. Some of these mini-primes offer relatively robust hearsay reporting. 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. This involves a fund maintaining its long positions at custodial banks while using a prime or primes for stock loan and leverage. quite simply. Indeed.) Fund Administrator (Outsourced) . the days of an investor willing to write a $50 million check to a fund that has no formalized PrimeBrokerageGuide. One. and a not to be underestimated factor. however. these offerings have not been met with great enthusiasm from the hedge fund community. They. 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. (Tri-Party Arrangement . It is mentioned here because this model is becoming an increasingly popular way for funds to diversify their counterparty risk. After all. It is true that Excel is a very flexible tool but there are many drawbacks to this approach.Another variant of the prime model is a hybrid between a custodial bank and a prime brokerage. The turmoil surrounding the leading primes has meant a mass exodus of many smaller funds towards these mini-primes.org 23 .The Prime Brokerage Book group known as the Mini-Primes. Microsoft Excel (Onsite) – Some firms attempt to overcome the operational complexity of multi-prime by using Excel. suffer from many of the drawbacks of their larger brethren.com PrimebrokerageAssociation."Middle and Back Office" . A New Approach .org 24 . funds however. Two. integrate and maintain these disparate legacy systems. This comes at a considerable cost and usually involves hiring a team of technologists to implement. It places the FIX enabled portfolio management system at the very heart of all of a hedge fund's activities. must realize PrimeBrokerageGuide.com PrimebrokerageAssociation.For ultimate control of their multi-prime data a fund typically feels that their only option is to acquire an onsite PMS. As funds embrace the world of multi-prime they are discovering that the accompanying operational burden must somehow be addressed. 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.The Prime Brokerage Book infrastructure are long since gone. Legacy (Onsite) . OMS and increasingly an execution management system (EMS). all made available through the Software as a Service (SaaS) deployment model. 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. Investors now spend almost as much time doing operational due diligence as they do research into a firm‘s risk and return profile. Excel is not built to handle real-time decisionmaking. Three.Nirvana Solutions Nirvana Solutions‘ purpose built approach for hedge funds dispenses with the usual trade-off between cost and control. There are a number of competing solutions available to this problem. Conclusion The credit crisis has brought home to the hedge fund community the risks associated with the captive single prime broker model. This single real-time database architecture ensures that everyone in the front. 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. Furthermore the SaaS model ensures that a firm‘s focus remains on alpha generation and not on IT support. middle and back office shares access to the same real-time and historical information displayed in a form specific to their role. which provides profiles.com. Both of these factors are now critical in this new era of increased volatility and depressed returns.org 25 . Investments (ADI) LLP Analytix Capital Avenue Capital Group Anchor Point Capital LLC | Babylon Fund LP | Hedge Albert Hsu Case Fund Notes Andor Capital Management & Balyasny Asset Management Daniel Benton LP Angelo Gordon Barington Capital Group LP | Appaloosa Management Hedge Fund Notes Aquiline Capital Partners Bessent Capital Arcanum Capital BlueCrest Capital PrimeBrokerageGuide. and in the amount of IT support required.com PrimebrokerageAssociation. Hedge Fund Manager Tracker Profiles: Abax Global Capital Management Absolute Capital Artradis Fund Management Management | Jonathan LP Treacher Asset Management Finance Acorn Capital Group Corp AguasClaras Investimentos Atticus Capital Alternatives Derivatives & Autonomy Capital Research. particularly in terms of their ability to offer true real-time views of P&L and Risk. Hedge Fund Managers | Manager Profiles & Notes Below is a tool developed by HedgeFundBlogger. news and trend notes on hundreds of hedge fund managers.The Prime Brokerage Book that the capabilities of these solutions vary greatly. LLC DE Shaw Group Diapason Commodities Management SA | Commodity Management Drake Capital Management LLC Drury Capital CTA Fund Durrant Capital Management.The Prime Brokerage Book Blue Mountain Capital Managment. LP Goldman Sachs Hedge Fund Goldman Sachs Hedge Fund Launch Gottex Fund Management 26 PrimebrokerageAssociation.org .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 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.com Davidson Kempner Capital Deephaven Capital Management. 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 PrimeBrokerageGuide. 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. Moore Capital Management.org . 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 27 PrimebrokerageAssociation.com Millennium Partners Mitsui & Co. 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 PrimeBrokerageGuide.The Prime Brokerage Book 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. Sellers Capital Traxis Partners LP Sloan Robinson Tremblant Capital Group | Sparx Group Co.The Prime Brokerage Book Ramius Capital Group LLC Tenaska Capital Management Renaissance Technologies LP | Hedge Fund Notes Ritchie Capital Thames River Capital RMB Asset Management The Blackstone Group | Kailix International | Tom Joy Advisors SAC Capital Advisors.org 28 . LP The NIR Group LLC | SageCrest LLC Alternative Investments Sageview Capital LLC Hedge Fund Notes Sandell Asset Management The Spanish River Group Corporation Threadneedle Asset Salida Capital | Hedge Fund Management | Hedge Notes Fund Notes Satellite Asset Management Tontine Associates Sciens Capital Management TPG-Axon Capital LP Trafelet & Co.com PrimebrokerageAssociation. Ltd Bret Barakett SRM Global Tudor Capital Steelhead Partners LP Vallea Capital Sugarloaf Rock Capital Veritas Asset Management System Absolute Return Viresco International Capital (SAR) Management T2 Capital Partners Viking Global Investors Tai Tam Capital Vision Capital Tantallon Capital York Capital Temujin Global Asset Management 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 PrimeBrokerageGuide. org 29 . custody.Certain prime brokers lease commercial real estate.The provision of risk analytic technology. certain prime brokers provide additional "value-added" services.  Consulting Services . and then sublease blocks of space to hedge fund tenants. 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 Prime Broker benefits by earning fees ("spreads") on financing the client's long and short cash and security positions. sometimes supplemented by consulting by senior risk professionals. and by charging. PrimeBrokerageGuide. which may include some or all of the following:  Capital Introduction . These prime brokers typically provide a suite of on-site services for clients who utilize their space.The Prime Brokerage Book 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.  Risk Management Advisory Services . 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.com PrimebrokerageAssociation. in some cases.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. fees for clearing and/or other services.  Office Space Leasing and Servicing . and the hedge fund's collateral requirements are netted across all deals handled by the Prime Broker.A range of consulting / advisory services. 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. The following services are typically bundled into the Prime Brokerage package:  Global custody (including clearing. Fundamentally. money managers had to keep track of all of their own trades. hedge funds were much smaller than they are today and were mostly U. in a centralized master account at their prime broker. the advent of the Prime Broker freed the money manager from the more time consuming and expensive aspects of running a fund. portfolio management was a significant challenge. all of the hedge fund‘s cash and securities. The first non-U. as well as in the jurisdiction(s) where the fund itself will be domiciled. best execution. In the pre-prime brokerage marketplace.S. the first hedge fund operation is attributed to Alfred Winslow Jones in 1949.The Prime Brokerage Book typically provided to "start-up" hedge funds. Merrill Lynch. Lehman Brothers. The concept and term "prime brokerage" is generally attributed to the U. History The basic services offered by a prime broker give a money manager the ability to trade with multiple brokerage houses while maintaining. the prime broker offers stock loan services.org 30 . Through the 1980s and 1990s. portfolio reporting. conference access and other products. However.S. prime brokerage business was created by Merrill Lynch's London office in the late 1980s. and was quickly copied by the dominant bulge bracket brokerage firms such as Morgan Stanley. and focused on issues associated with regulatory establishment requirements in the jurisdiction where the hedge fund manager will be resident. Additionally. domestic long-short equities funds. In addition. although various prime brokers did supplement their core equities capabilities with basic bond clearing and custody. These services worked because they also allowed the money manager to maintain relationships with multiple brokerage houses for IPO allocations. At this nascent stage.com PrimebrokerageAssociation. The concept was immediately seen to be successful. consolidate their positions and calculate their performance regardless of which brokerage firms executed those trades or maintained those positions. broker-dealer Furman Selz in the late 1970s. prime brokers supplemented their PrimeBrokerageGuide. prime brokerage was largely an equities-based product. consolidated cash management and other services. Bear Stearns. research. and Goldman Sachs.S. revenues are typically derived from three sources: spreads on financing (including stock loan). such conditions arise PrimeBrokerageGuide. then by fax and today over the web. trading commissions and fees for the settlement of transactions done away from the prime broker. foreign exchange (fx). As of 2006. Risks Prime Brokers facilitate hedge fund leverage. Fees Prime brokers do not charge a fee for the bundled package of services they provide to hedge funds. as well as foreign exchange and futures products. In this regard. In practice. The financing and lending spreads. Over the years. futures. make up the vast majority of prime brokerage revenue. and flow business areas of the investment bank. which are charged in basis points on the value of client loans (debit balances). primarily through loans secured by the long positions of their clients. 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. 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 synthetic financing products such as swaps and CFDs (Contract for difference). prime brokers have expanded their product and service offerings to include some or all of the full range of fixed income and derivative products. client deposits (credit balances). prime brokerage has become an increasingly competitive field and an important contributor to the overall profitability of the investment banking business. client short sales (short balances). and the client is unable to repay the deficit. initially by messenger. Therefore. As hedge funds have proliferated globally through the 1990s and the current decade.The Prime Brokerage Book operational function by providing portfolio reporting. Rather.org 31 . but may still present significant economic opportunity in the repo. Clients whose market activities are principally fixed income oriented will generally produce less prime brokerage revenue. 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).com PrimebrokerageAssociation. Fidelity. 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: PrimeBrokerageGuide.The Prime Brokerage Book only in the case of extraordinary volatility or unexpected correlation reversions and are exceedingly rare. Large prime brokerage firms today typically monitor the risk within client portfolios by either Value at Risk (VaR) or "Rules Based" stress testing. As counterparty risk management and multi-prime brokerage both grow in popularity this trend will only increase. Credit Suisse. and Deutsche Bank (view our list of prime brokers on the right hand side of PrimeBrokerageGuide. 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. These larger banks often make money by catering to both institutional and retail clients and are less likely to fail. Other forms of risk inherent in Prime Brokerage include operational risk and reputational risk.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.org 32 . Some of these firms to recently benefit have been BNP Paribas.com PrimebrokerageAssociation. 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). Roy Martins. a source familiar with the business said. has also benefited from an influx of business in its prime brokerage in the last six months. the bank's head of international prime services..The Prime Brokerage Book Broker-dealers such as Morgan Stanley and Goldman Sachs are losing out in the battle for hedge funds' dwindling pool of assets. Prime brokers make money by charging hedge funds fees for providing financing for trading and settlement of trades. a source close to the bank said.VX). as funds seek out banks with diverse sources of funding in a major shake-up of prime broking." Deutsche Bank (DBKGn.. as those with accounts at Lehman when it sought bankruptcy protection had those assets frozen and risked being unable to close trades. led many hedge funds to flee the two largest prime brokers. 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. Credit Suisse (CSGN. Morgan Stanley and Goldman. backed up by its big retail bank.PK) in September shocked hedge funds." said Berstein Research analyst Brad Hintz in a note. saw balances in its prime brokerage unit grow 50-60 percent last year compared with 2007. whose operations include a large wealth management unit as well as prime broking. said: "There was a peak in terms of business in September and October.DE). What needs more PrimeBrokerageGuide. "The Lehman bankruptcy . All the clients we took on had existing relationships and dialogues with us as they were clients we had been targeting anyway.com PrimebrokerageAssociation.org 33 . for the perceived safety of the universal banks. The collapse of investment bank Lehman Brothers (LEHMQ. com PrimebrokerageAssociation. The development of a standardized. 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.Effectively monitoring counterparty risk will continue to be a critical component of a hedge fund's business operations. Best practices for proactively managing counterparty risk include: * Leveraging innovative services from prime brokers. focuses on the heightened importance of effectively managing counterparty risk and the integral role it plays in partnering with a prime broker. An overwhelming 96% of respondents also cited managing counterparty risk as the number one factor in selecting their prime broker relationships. It also highlights best practices that have been implemented by other hedge funds to help address and mitigate counterparty risk. Concerns about managing counterparty risk two years ago were not a primary issue for most hedge funds. well-documented approach to analyzing counterparty risk remains one of the top priorities for the hedge fund community.org 34 . such as a triparty account approach * Conducting consistent internal portfolio and risk assessments * Formalizing business processes by outsourcing and installing inPrimeBrokerageGuide. 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. 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. 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 -.The Prime Brokerage Book 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. All indications are that 2009 will continue to be as volatile as the latter half of 2008.The Prime Brokerage Book house technology solutions such as portfolio management systems * Implementing third-party independent valuation technology solutions and service providers supplemented with in-house valuation tools. 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 new requirements of the next generation of hedge funds These funds will be smaller.This will be true for both new and more established funds. for many funds.com PrimebrokerageAssociation. more opportunistic.  Market volatility . and • Adoption of Technology -. and less likely to focus on any one strategy or asset class.org 35 . Now. Funds preferred to build out their own middle. the need to aggressively cut costs will trump these PrimeBrokerageGuide.and backoffice functions citing concerns around flexibility and privacy.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. Three technology trends for 2009: 1 – Outsourcing – Historically hedge funds have resisted efforts to outsource. The trends we will witness in 2009 will primarily be the result of the following drivers:  Increased cost consciousness . taking a step back we can see that there has always existed incredible duplication of effort across the hedge fund eco-system. can offer a real-time understanding of risk and return (i. As noted earlier. 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. All hedge funds. 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. The leading primes can no longer be profitable in this new world of multi-custodial relationships. The industry can no longer support this duplication.org 36 . 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. Interestingly. 2 – Restructuring of the industry's service providers. and 2/ systems. and fund admins. 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. all conduct the same processes using the same legacy "T+1" portfolio management systems. 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. 3 – Real-Time systems – In this new world of opportunistic alpha.com PrimebrokerageAssociation. except the very largest. execution management systems).e. The biggest news here will be rise of the mini-primes. PrimeBrokerageGuide.e. This leaves the lower-cost-structure mini-primes ideally positioned to fill the void. will begin to look to third-parties to offload this operational burden. prime brokers.The Prime Brokerage Book concerns and force outsourcing. hedge fund managers can no longer afford to rely on systems that offer "T+1" reporting. 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. that once an investment decision has been implemented. real-time portfolio management systems and risk management systems). In many cases hedge funds. Founded in 2006.com PrimebrokerageAssociation. financing. Nirvana Solutions is a San Francisco based software company that provides real-time portfolio management solutions to multi-prime hedge funds and prime brokers. This white paper claims that the benefits of adding a second prime broker include:  Mitigation of risk: counterparty. 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 PrimeBrokerageGuide.org 37 . swap trading or market access  Catalyst for reduced dependency on outside service providers. liquidity and operational  An additional source of alpha-generating trade ideas.  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. 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. etc.The Prime Brokerage Book Article contributed by Peter Curley of Nirvana Solutions. capital introductions. Where the Industry Is Now: Most hedge funds with more than $250 million in assets have relationships with two to four primes. Due diligence is an alpha source itself.. which are PrimeBrokerageGuide. "There are people who either had long assets on deposit and can't get them back or. founder and CEO of TABB Group. Some hedge funds that primed with Lehman had their assets frozen as part of the European bankruptcy proceedings against Lehman. hedge funds that had prime brokerage relationships with these firms were exposed to significant counterparty risk. Why It's Important: With the demise of Bear Stearns in March 2008 and the bankruptcy of Lehman Brothers this past September. This article is by Veryan Allen. He was never part of the hedge fund industry. here is an excerpt: Bernie Madoff was a stock broker "managing" client accounts.The Prime Brokerage Book fraud case. And portfolio diversification with NUMEROUS strategies and managers is mandatory. He did not charge 2 and 20 and had no prime broker. 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." explains Larry Tabb. worse.com PrimebrokerageAssociation. 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.. Few professional investors invested directly with so many red flags in abundance. Lehman borrowed the assets and lent them out.org 38 . His firm was "regulated" and fraud is already illegal. driving some to liquidate securities to meet redemption calls from investors and even forcing some out of business. read more. proper auditor or independent administrator. 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.The Prime Brokerage Book picked for their trading expertise in certain asset classes (e. diversifying can be difficult because the large prime brokers have minimum-asset requirements and other constraints to weed out the smaller players. however. Smaller hedge funds.com PrimebrokerageAssociation. Funds of all sizes now demand multiple custodial relationships. source Prime Brokerage Agreement | Contract Example While looking for a white paper on prime brokerage I stumbled upon an example prime brokerage services contract. typically launch with a single prime broker that may provide trading systems. This reality combined with the primes' decreased risk tolerance means that we are seeing a mass exodus away from the top-tier primes. 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.. FX or derivatives) or geographies. with $10 to $15 million in AUM. such as Europe or Asia. stock loans and clearing. For smaller hedge funds.org 39 . Anecdotal evidence suggests that these primes are now in the process of weeding out clients that manage less than $100 PrimeBrokerageGuide.g. To view the example prime brokerage agreement please click here. 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. margin accounts. Interestingly we are also seeing a number of new entrants to this expanded segment of the prime brokerage industry.com PrimebrokerageAssociation. their cost-structures evolved in a way that allows them to offer prime services profitably at this lower end of the market. and 2 more importantly. It is no secret that size kills alpha. Two important differences remain: 1 . This regeneration process is vital to the health of the industry and for many investors. If they are not lucky enough to find another successful strategy.org 40 . Many successful funds follow a familiar arc.000. returns will continue to suffer.The Prime Brokerage Book million or that do not generate annual revenues of at least $250. 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.The mini‘s still use the clearing services of their larger prime broker brethren. They gain attention (and funds) by earning outsized returns. technology infrastructure etc. as well to develop new revenue streams.Who will fill the void and offer prime services to the lower end of the market? Who will provide the financing. This term is rapidly becoming obsolete as the mini-primes now find themselves expanding their offerings to attract the funds that have been displaced. This retrenchment by the leading prime brokers raises the obvious questions . We are also witnessing primes becoming more selective about what type of funds they are willing to service. as they grow in size their primary strategy reaches capacity and they experience a leveling off of returns. capital will begin to flow out and ultimately investment talent will go in search of new opportunities. by building out a prime brokerage offering. Funds whose strategies involve less liquid securities and/or high leverage are now finding the bar set much higher. These are for the most part more traditional brokers who see an opportunity to increase the stickiness of their execution services. PrimeBrokerageGuide. stock loan. Historically the group charged with picking up the crumbs left by the leading primes was a group known as the mini-primes. it is the promise of catching a smaller fund during this growth phase that motivates them to invest. causing an increasing number of hedge funds to block investors from redeeming shares (see NY Times article).com PrimebrokerageAssociation. but they cannot check out (see Bloomberg article).04 percent in November. after a drop of 9. 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. such as Fortress PrimeBrokerageGuide.org 41 . 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. in what is becoming a financial roach motel where investors can check in. The winners will be the firms that understand that the new economics of prime brokerage demand a new industry infrastructure. will cause additional funds to close. 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.3% YTD through November. The increased use of gates has even spread to some of the previous stars of the industry.26 percent in October (see FIN Alternatives article). approximately 100 hedge funds have placed restrictions on withdraws. although others insist they will take the high road and not close until they are profitable again. right to the desktop of the hedge fund. which would force some under-performing funds to earn back 25 percent or more before taking profit fees. That brings the index down 22.The Prime Brokerage Book Only time will tell who will be successful in this greatly altered landscape of prime brokerage. 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. Continued poor performance has increased redemption requests. As of the end of last week. High-water marks. the problems are even worse for those funds investing in emerging markets. and prime brokers acting as business partners to hedge fund managers.The Prime Brokerage Book Investment Group. mergers within the industry and widespread failures and redemption notices of hedge funds themselves. 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)..org 42 . limiting capital introduction services. Multi-prime brokerage relationships used to be used by $5B+ hedge funds whose large institutional clients demanded the practice as a risk management technique. 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. and D. This is due to a number of factors including the struggle and failure many investment banks offering prime brokerage services including Lehman Brothers. 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. 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. Furthermore.com PrimebrokerageAssociation. The top three trends affecting the prime brokerage industry right now are multi-prime brokerage relationships.41% on average in November (see Bloomberg article). In the past this was almost though of as unnecessary as no large investment banks offering prime services PrimeBrokerageGuide. Tudor Investment Corp. Finally. which continue to under-perform and are down an additional 1.E. even with new gating restrictions. Shaw & Company (see WSJ article). It was seen in the same light as a major economic superpower defaulting on their own investment notes. 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. Prime brokerage firms are now publishing white papers. Anyone offering these services lately has faced increased challenges of investors sitting on cash.The Prime Brokerage Book had collapsed. This year. poor market and overall industry performance along with increasingly frequent reports of hedge fund fraud. Lehman failed and many investment banks have struggled or sold off their prime brokerage services to other firms. in 2008 everything has changed. 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. This has lead to widespread migrations between prime brokerage service providers and a trend towards managing multiprime brokerage relationships for funds with over $500M in assets or even lower. 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. Another shift in the industry has been felt within the area of capital introduction services. investors Prime Broker List Nowadays this list seems to be changing daily .org 43 . Prime brokerage firms are no effected by this.com PrimebrokerageAssociation. This is due to the commoditized nature of the industry and high level of competition for new business. 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. The third major trend affecting the prime brokerage business is that more firms in the space are positioning themselves as business partners.but here is a PrimeBrokerageGuide. Jefferies & Company. Ridge Clearing & Outsourcing Solutions. PrimeBrokerageGuide. L. Inc. Lek Securities Corporation ITG. Baker Watts. BMO Capital Markets Corporation Morgan Stanley & Co. RBC Capital Markets Corporation Ferris.C.C.C.com PrimebrokerageAssociation.L. Fortis Clearing Americas LLC Goldman Sachs Execution & Clearing. Sanford C. J. L.P. Sachs & Co. LPL Financial Corporation National Bank Financial Inc. Bernstein & Co. LLC Barclays Capital Inc. Incorporated Interactive Brokers L. LLC Penson Financial Services. Ingalls & Snyder L. Prudential Bache Commodities. Prudential Bache Securities.L. Inc. LLC Morgan Stanley & Co. Barclays Capital Inc. Inc.C. Deutsche Bank Securities Inc. Inc. L. Inc. Wedbush Morgan Securities. Morgan Securities Inc. Dundee Securities Corporation Natixis Bleichroeder. Incorporated Legent Clearing LLC Prime Dealer Services Corp. Neuberger Berman.org 44 . MF Global Inc. Inc.P.L. Inc.The Prime Brokerage Book relatively recent list containing the names of over 190 prime brokerage firms: Goldman.L. LLC Neuberger Berman. Merrill Lynch Professional Clearing Corp. Banca IMI Securities Corporation First Clearing. .The Prime Brokerage Book Merrill Lynch Pierce Fenner & Smith Inc. Morgan Clearing Corp. Scotia Capital Inc. Nomura Securities International Inc. Gelber Group LLC BMO Nesbitt Burns.S. Inc. Inc.P. LLC J. Greenwich Capital Markets. Bank of America Securities. Credit Suisse Securities (USA) LLC MF Global Inc. LLC SG Americas Securities. Wachovia Securities. Inc. LLC Piper Jaffray & Co. LLC Goldman Sachs Execution & Clearing. Charles Schwab & Co. National Financial Services LLC Lek Securities Corporation BNP Paribas Prime Brokerage. Southwest Securities. RBC Dominion Securities Inc. Compass Professional Services. LLC Goldman Sachs Execution & Clearing. NYFIX Securities Corporation Merrill Lynch Pierce Fenner & Smith Inc. PrimeBrokerageGuide. Maple Securities U. L. RBC Capital Markets Corporation SMW Trading Company. ING Financial Markets LLC TradeStation Securities. LLC. Inc. Inc. American Enterprise Investment Services. Inc.org 45 . Inc. UBS Financial Services Inc. Inc. Barclays Capital Inc. L.com PrimebrokerageAssociation. Lazard Capital Markets LLC First Southwest Company Bank of America Securities. Electronic Brokerage Systems.P. LLC Penson Financial Services. Albert Fried & Company. Inc. Inc.P.A. L. Nasdaq Option Services. Janney Montgomery Scott L.P. Inc. Credit Suisse Securities (USA) LLC Terra Nova Financial. LLC Newedge USA.C. Archipelago Securities. BNP Paribas Securities Corp. Vision Financial Markets LLC Lek Securities Corporation Penson Financial Services.C. Sachs & Co. Fortis Clearing Americas LLC CGMI Citigroup Global Markets Inc.com PrimebrokerageAssociation. LLC USAA Investment Management Company Tradition Asiel Securities Inc. L. Goldman Sachs Execution & Clearing. LLC MS Securities Services Inc. Assent LLC Pershing LLC StockCross Financial Services. E*TRADE Clearing LLC Tradelink L. Inc. Inc.The Prime Brokerage Book optionsXpress. LLC J. Octeg.L.L.P. ABN AMRO Inc. LLC Paloma Securities. CIBC World Markets Inc. Stephens Inc. Goldman.L. L.org 46 . Automated Trading Desk Financial Services. Newedge USA.C. LLC MF Global Inc.L. Ziv Investment Company Merrill Lynch Professional Clearing Corp.C. PrimeBrokerageGuide. UBS Securities LLC MF Global Inc. Morgan Clearing Corp. CIBC World Markets Corp. C. LiquidPoint. / Merrill Lynch Futures Morgan Stanley & Co. UBS Securities LLC UBS Securities LLC Interactive Brokers L. Merrill Lynch Professional Clearing Corp. LP Vision Financial Markets LLC Tradelink L. BNP Paribas Securities Corp. L.C. Madoff Investment Securities LLC Daiwa Securities America.The Prime Brokerage Book Interactive Brokers L.L. Bernard L. Inc. Merrill Lynch Professional Clearing Corp. Barclays Capital Inc.L.org 47 . LLC Merrill Lynch Professional Clearing Corp. Merrill Lynch Professional Clearing Corp. Lakeshore Securities. LLC J. Inc. Newedge USA. Goldman Sachs Execution & Clearing.C.P.P. Merrill Lynch Professional Clearing Corp. L. Fortis Clearing Americas LLC Robert W.L. Newedge USA. Baird & Co.com PrimebrokerageAssociation. Merrill Lynch Professional Clearing Corp.P. Morgan Futures Inc. Merrill Lynch Professional Clearing Corp.L. Fortis Clearing Americas LLC Oppenheimer & Co. Incorporated Timber Hill L. Newedge USA. LLC.C. Incorporated Electronic Brokerage Systems. Deutsche Bank Securities Inc. LLC KDC Merger Arbitrage Fund.C. Calyon Securities (USA) Inc.L. LLC Merrill Lynch Pierce Fenner & Smith/Broker Dealer Execution Services Timber Hill L. TD Waterhourse Canada Inc. PrimeBrokerageGuide. TD Ameritrade Clearing. PrimeBrokerageGuide.P. Keegan & Company. Inc. LLC Fortis Securities.P. W. Hilliard. Inc. Goldman Sachs Execution & Clearing. LLC Scottrade. Lyons. L. Inc. LLC J.P. L. Fortis Clearing Americas LLC Cantor Fitzgerald & Co. J. Merrill Lynch Professional Clearing Corp. L.The Prime Brokerage Book Merrill Lynch Pierce Fenner & Smith/Broker Dealer Execution Services Goldman Sachs Execution & Clearing.C.J. LLC Newedge USA.P.P. Goldman Sachs Execution & Clearing. 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.com PrimebrokerageAssociation. Morgan Clearing Corp. L. LLC William Blair & Company. Mesirow Financial Inc. Inc. LLC Goldman Sachs Execution & Clearing.B. LLC H&R Block Financial Advisors. Goldman Sachs Execution & Clearing.L.L.P. LLC Raymond James & Associates. Clearview Correspondent Services. Morgan.C.L. Inc. Bank of America Securities. Newedge USA. Newedge USA. L. Fortis Clearing Americas LLC Wells Fargo Investments.org 48 .P. Fortis Clearing Americas LLC OCC/ICE CLEAR Cross Margin J. Morgan Clearing Corp. Citigroup Global Markets Inc. L. LLC Citadel Trading Group L. EWT. steep losses or all three. 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. Chicago Mercantile Exchange Goldman Sachs Execution & Clearing. L. We were reminded of this today when we discovered that Amaranth’s lawsuit against JP Morgan Chase was still going on. LLC Nomura Securities International Inc. Bank of America Securities.com PrimebrokerageAssociation. It seems like a PrimeBrokerageGuide. Prime Brokerage Lawsuits Hedge Fund Lawsuit | Legal Actions (http://HedgeFundBlogger. With gates dropping as fast as assets at many hedge funds investors may be often left with locked-up assets. The last thing the industry needs is wave of 500+ lawsuits against hundreds of the top managers in the industry.P.com) Perhaps more dangerous than a wave of further redemptions in the hedge fund industry would be a wave of legal actions. 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.org 49 . After what we’ve been through in the past year that all seems like the good old days.The Prime Brokerage Book Merrill Lynch Professional Clearing Corp. partial withdrawals. com PrimebrokerageAssociation. (Think: regulating mortgage brokers.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. 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. there were recriminations in all directions. Those feelings because a lawsuit. not the hedge funds themselves that require stricter regulation. but I would be surprised if regulators gone down this road. Prime Brokerage Regulation Are New Regulations Possible? (http://PrimeBrokerageGuide. Read more. Amaranth’s lead energy trader. From a cost perspective this may make sense since this is a central point of potential risk control. famous.. Ergo. of course. JP Morgan. This state of affairs is courtesy of the significant amount of concentration in the hedge fund industry. felt he was done in by nefarious deeds at his prime broker. and sold its assets to JP Morgan and Citadel. not home-owners…) PrimeBrokerageGuide. the average dollar invested in a hedge fund is managed by a large manager who regularly uses leverage.The Prime Brokerage Book lifetime ago that the fund run by Nick Maounis imploded amid bad bets on natural gas. Amaranth lost $6 billion. It was the trade that made Brian Hunter. I believe regulations will stay at the security level and then target banks more directly than hedge fund managers.. Hunter is said to blame Maounis for not having the available cash to cover the margin calls. Maounis. While the average hedge fund is small and uses a very small amount of leverage. 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. for his part. collapsed. Afterwards.org 50 . it is the prime brokers. The Prime Brokerage Book 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. PrimeBrokerageGuide.com PrimebrokerageAssociation.org 51 The Prime Brokerage Book ―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 PrimeBrokerageGuide.com PrimebrokerageAssociation.org 52 The Prime Brokerage Book 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: PrimeBrokerageGuide.com PrimebrokerageAssociation.org 53 When the hedge fund begins the trade. Otherwise. global head of prime services at UBS. the fund provides the executing broker with the prime broker's name and the relevant account with the prime broker. The moves have shaken up a business long dominated by Morgan Stanley.org 54 . he performs back office functions on behalf of the hedge fund client with the broker-dealer that executed the trade. people kill themselves to move 1 percent of market share. The prime broker then performs a post-trade matching. the prime broker works with the hedge fund and the executing broker to resolve the differences." Financial Clearing and Execution Services Clearing is one of the most basic services provided by a prime broker. passing the trade information) to the prime broker. confirms the trade with both sides if the trade details match. "It's a $2 trillion business and in normal market conditions.The Prime Brokerage Book Across Wall Street. the executing broker gives-up the trade (meaning. probably 35 to 40 percent of global market share has been redistributed. In recent weeks.com PrimebrokerageAssociation. Goldman Sachs Group Inc and Bear Stearns. Respectively. the prime broker allows the hedge fund to trade under the prime broker's name and assumes the role of the hedge PrimeBrokerageGuide. and the hedge fund reports the allocations of the trade to the prime broke. the choice of the executing broker includes but is not limited to the trading desk of the prime broker. When a prime broker is hired to carry out clearing. "Never has there been a more disruptive period. For the hedge fund. (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." said Alex Ehrlich. hundreds of investment funds that relied on broker-dealers established accounts with commercial banks boasting stronger credit. Loader (2002) gives an in-depth analysis for the clearing and settlement services in the general financial markets. in which case the prime broker clears and settles the trade on behalf of the hedge fund but does not assume counterparty risk. the financial crisis has proven the need for the multi-prime brokerage model. Ron Suber. According to Sameer Shalaby. The prime broker could also act as agent. "to help (executing brokers) give up their transactions electronically not just to one prime broker but to all (of their) prime brokers"(more)." (full article) The process for a hedge fund to clear through multiple prime brokerage firms has been made easy. OTC derivative and credit markets. three leading foreign-exchange prime brokers . Exchange or cash traded securities are usually cleared on an agency basis. explains in an article dated Oct 2008 that Merlin's technology allows funds to aggregate data from different prime brokers on one system.Deutsche Bank. In 2008. Fixed Income Prime Brokerage: Agency Model Prime Brokerage Flows PrimeBrokerageGuide. thanks to the available technologies. head of global sales and marketing and a senior partner at Merlin Securities.The Prime Brokerage Book fund with respect to the executing broker. Principal prime brokerage is most common in the foreign exchange. "(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.org 55 . "That has led to Merlin picking up dramatic new business given its multi-prime services." By Yifei Huang Sources: Hedge Funds and Prime Brokers. In as early as 2003. 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.com PrimebrokerageAssociation. CEO of Paladyne Systems. 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. On the other hand. I have heard this directly from prime brokerage firms. PrimeBrokerageGuide. The result has been a boom for rivals like Deutsche Bank and Credit Suisse. 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. as well as for other investors. The prime brokerage units inside the big investment banks provide financing. Two major prime brokers — Bear Stearns and Lehman Brothers — are gone.. according to Investment Dealers‘ Digest. Read more.The Prime Brokerage Book 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. I've also heard that managers are holding more cash than usual. These units hold on to billions of dollars of their investors‘ cash and help execute their trading strategy. clearing and settlement services for hedge funds. Some that depended on Lehman as their sole prime broker remain paralyzed..com PrimebrokerageAssociation. which have all fought for years to lure prime brokerage clients away from their big rivals. while two more — Morgan Stanley and Goldman Sachs — have had hundreds of clients pull their money out of their prime brokerage units. But the demise of Lehman Brothers last month shook up this lucrative business.org 56 . Stock Market Trading Volume There was an article out today in the FT about low stock market trading volume. as well as independent prime brokers. say analysts. dropped 9. volume was only 11.recent data suggests that Asian funds are down more than their peers over the last few months.9 per cent. 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.2 per cent. that combined with traditionally using less leverage than some other funds might have helped a few Asian hedge funds weather this storm. having lower trading levels. The exception to this seem to be those few funds which thrive during this type of market volatility.The Prime Brokerage Book taking more cautious trading positions than usual.com PrimebrokerageAssociation.most funds are working within negative territory for 2008. By a few I mean very few .5bn shares... with only October 1 and 2. Indeed volume was only 58 per cent of the record reported on October 10 when the S&P 500 fell just 1. when the ban on short-selling financials was still in effect.org 57 . but as the index figures which published this morning show . 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. its largest one-day drop in more than 60 years. for example. This was the third lowest volume day that month. On October 15. Wall Street‘s benchmark equity index. Below is an excerpt on how some Asian funds have dodged the prime brokerage woes of US and UK based groups: PrimeBrokerageGuide. 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. when the S&P 500. thanks to their use of 'far less' leverage.The Prime Brokerage Book ASIAN hedge funds are relatively shielded from the distress that their counterparts in developed markets are weathering. "Any time you take a business running at 30 times (leverage) and take it down to 16 to 17. forcing banks to cut back. said UBS head of prime services (Asia Pacific) David Gray. that changes the nature of your business. Asian hedge funds could see redemptions of between 10 and 40 per cent." he said. with a market share estimated at about 15-17 per cent. Funds' cash levels vary between 20 per cent and more than 50 per cent. .‖ Still.com PrimebrokerageAssociation. cash levels were between 5 per cent and 10 per cent. UBS yesterday hosted its third pan-Asian hedge fund conference. 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. profit and revenues have plunged. A year ago. ―far higher than we have seen previously‖. Prime brokerage continues to generate strong results for the group.org 58 . 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. ―Our clients have been extremely sensible in the way they use gearing . A clearer picture of the redemption rate is expected to emerge in early November. "We have to look at that and resize it. . The bank's prime brokerage is the third largest in Asia after Goldman Sachs and Morgan Stanley." PrimeBrokerageGuide. and far more constrained in their use of illiquids. Lehman Brothers Holdings Inc. 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. down from more than $30. PrimeBrokerageGuide. revenues flowing through Morgan's prime brokerage business will decline. 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.com PrimebrokerageAssociation. Mack said. Morgan Stanley shares some of the blame for being overleveraged. told the Financial Times. 15 (Bloomberg) -. Here is a short excerpt from a news piece on this topic: Oct.'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. Morgan Stanley now has less than $20 of assets for every dollar of equity.The Prime Brokerage Book 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. he said. which are frozen within Lehman Brothers.org 59 . well-known as a mutual fund powerhouse. The Boston company. Fidelity said half its clients have $1 billion or more. The company has been broadening its business model. and has been shedding assets and raising capital to reduce its leverage ratio. Source Fidelity Prime Brokerage Fidelity Investments is building out its prime brokerage. As a result. It launched a prime brokerage in 2003. They are not the only vultures circling.." and so on. said in an interview in Lehman's Canary Wharf office.com PrimebrokerageAssociation. Mikhail Fridman of the Alfa Group.The Prime Brokerage Book Lehman's London-based prime brokerage has about 3.) 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 . operations. On Monday. and gave his strong blessing for an acquisition of foreign banking holdings (preferably American. The clients may be required to put up more collateral if the value of those securities drops.. If the value of the securities fell.K. They hold an additional $20 billion in short positions. the partner at PricewaterhouseCoopers responsible for unraveling Lehman's U. a process known as a margin call.I fully share your view. executives from France's mostly-stillPrimeBrokerageGuide.500 active clients including hedge funds that own about $45 billion in securities.. 43. the Times reported that. While investors are largely unable to access their Lehman accounts.'' 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. there are nonetheless some good opportunities for concluding investment deals.'' Pearson." to which Mr. the value of the securities continues to fluctuate along with the markets.. Dmitri Medvedev met with the leader of one of Russia's largest conglomerates. they have to meet margin calls. or bets that prices will fall. you still have to pay your mortgage. Fridman is reported to have said "this is absolutely correct. Steven Pearson. late last month. ``Who is the holder of the risk of the securities? The hedge funds. ``If your bank fails. That same day. said in an interview.org 60 . Here's a recent article on this topic: As the United States falters. its competitors are scheming. though a large and diversified bank is more stable than a niche one.. investment banks operating independently of commercial banks—being more vulnerable than.com PrimebrokerageAssociation. or the Japanese model. the European universal banks. Citigroup. Read more. What can this all mean? One way to look at it is as a form of creative destruction in action. By Nov 2007. Morgan Stanley and UBS all hired for their Singapore prime brokerage operations in 2006. say. Lehman Brothers. For Societe Generale. Prime Brokerage Singapore When visitors arrive at Singapore's Changi Airport. But the American model is still more attractive than the Russian banking model. it was the brokerage industry. which is an unintended consequence of absent investment opportunities within Japan itself. failure of such a bank could be more catastrophic to the overall system). For BNP Paribas. Singapore serves as prime broking regional PrimeBrokerageGuide. BNP Paribas bought over Bank of America's prime brokerage unit and now competes with JP Morgan and Goldman Sachs.. According to an article dated Feb 2007 from eFinancialCareers. with the American model of specialist banking— that is. that included a bid for investment banking and equity derivatives.The Prime Brokerage Book solvent banks gathered to discuss opportunities in banking sectors traditionally dominated by American companies. "prime brokers are in hiring mode" . which seems to depend on political favor and is less dynamic besides. This was one of the jokes making the rounds in 2007. though the latter have problems as well (for one thing.org 61 .Barclays Capital. Japanese companies are attempting to derive similar benefits. they get both an immigration card and an application form for opening a hedge fund. The fact is that hedge funds in Singapore were growing fast since 2006. And little time was lost—last Wednesday. by Yifei Huang Prime Brokerage Software Prime Brokerage is very competitive and industry players are always looking for an edge. Morgan Stanley is looking at scaling back its prime-brokerage operation (detail). had previously been servicing its Singapore clients from Hong Kong. As the growth of hedge funds slowed down due to the credit crisis. Another source reports that in Sep 2008.org 62 . Traiana is an example of a provider of financial technology used by banks worldwide and prime brokers involved in the foreign exchange industry. according to HedgeFund Intelligence. indicated by Citi's move to add eight professionals to four Asia offices in Aug 2008. Levy's hire fills the hole left by Harvey Twomey. to join the firm's Singapore office. It is said that Citi has fired "the latest salvo in the prime brokerage talent wars in Asia".The Prime Brokerage Book headquarters for Credit Suisse Group. The company has recently been selected to assist ABN AMRO by PrimeBrokerageGuide. In Feb 2008. but the Asian prime brokerage industry remains sizzling"(FINalternatives). Merrill Lynch hired Aussie hedge fund CEO Jeffrey Levy for Asia prime brokerage. including transferring Danielle Vint to handle the prime brokerage's fixed-income desk in Singapore. 2008. As reported on Oct 4th. to service the fast-growing number of hedge funds in that market. Citigroup Inc and Barclays Capital plc. Deutsche Bank has moved Chris Pagan (LinkedIn) from Hong Kong to Singapore in order to head prime brokerage for Southeast Asia. who left Merrill Lynch to join Deutsche Bank as head of global prime finance sales in Asia.com PrimebrokerageAssociation. Morgan Stanley. However others believe that "Asian hedge funds may be cold. an article (download pdf) dated Feb 2008 pointed out that "their (referring to the prime brokers in Singapore) enthusiasm for growth is now waning". Citigroup and Morgan Stanley also opened Singapore prime brokerage offices in 2007. the top Singaporean prime broker by assets under management according to Eurekahedge. foreign exchange and derivatives markets. to provided their Advent‘s Geneva® to help in management of Jefferies‘ growing prime brokerage offerings. global head of prime services.org 63 . fixed income. CSFB. "…the amount of leverage PrimeBrokerageGuide. which advises hedge funds on borrowing strategies.. The new system will allow CSFB to provide its institutional clients with risk assessment across their holdings in the equity. Source In a bid to gain market share in the ultracompetitive prime brokerage market. Source An Explanation | Prime Brokerage Leverage One of key functions of prime brokers is to provide financing to its hedge fund clients. Due to the recent credit crunch. Credit Suisse First Boston has added a customized risk assessment and trading system to its prime brokerage unit. on a portfolio by portfolio (or client by client) basis." said Josh Galper. California. he said. is headquartered in San Mateo. a top tier global investment bank and institutional securities firm. Traiana. JP Morgan Chase. and Societe Generale. CSFB has been considering systems to accomplish this for more than a year. so they can acquire the leverage needed for their strategies. Morgan Stanley. Since with leverage can come increased risk. and Tel Aviv. according to Philip Vasan. Deutsche Bank. AIG Trading. managing principal of Vodia Group.com PrimebrokerageAssociation. "Leverage is being closely watched. 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.The Prime Brokerage Book providing technological enhancements for use in their developing FX prime brokerage service. London. Customers include ABN AMRO. Recently. with offices in New York. 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. Advent Software has been selected by Jefferies & Company Inc. Chicago. the prime broker requires the hedge fund to post $25 million of equity. according to an article by HedgeWeek. and the prime broker gains interest on the debt. While the structure of this form of financing varies. for obvious reasons. and charges the interest in the form of a swap payment received from the hedge fund. Source: Hedge Funds and Prime Brokers PrimeBrokerageGuide. in this case even though hedge fund manager trades the account to implement the hedge fund's strategy. in other words.com PrimebrokerageAssociation. So different from the first method. the portfolio actually belongs to the prime broker. the hedge fund borrows some portion of the security's value from the prime broker. As margin for the swap. thereby providing leverage of 4 to 1. using $25 million of its own assets and $75 million of margin debt provided by the prime broker. The prime broker sets up an account advised (or managed) by hedge fund manager who has trading discretion.with equity swaps used side by side with stock loan and other services for particular parts of their portfolios. The account is advised by the hedge fund manager. The prime broker then enters into a total return swap with the hedge fund. Through this synthetic prime brokerage service. the prime broker has an account with $100 million of its own assets. the hedge fund holds a portfolio with a value of $100 million. the leverage used by the fund is determined by the amount of margin on the swap required by the prime broker. For example.The Prime Brokerage Book being utilized is being reviewed much more carefully than it has been in the past. where the hedge fund is the counterparty to a total return swap on that account." (See article from MarketWatch) There are two major methods that a prime broker can lend leverage to a hedge fund. This way the hedge fund achieves a leverage of 4 to 1 (assuming only long positions). and is usually termed "synthetic prime brokerage". one approach takes the form of a managed account swap. The alternative way of extending leverage is through the OTC derivatives. The first is by providing margin financing.org 64 . Many hedge funds use synthetic prime brokerage service as part of a full service prime brokerage agreement . To follow the example above. 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. Therefore.The Prime Brokerage Book 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. it is said. Instead. and Goldman Sachs Group Inc. client short sales (short balances). which are charged in basis points on the value of client loans (debit balances). and fees for the settlement of transactions done away from the prime broker. This business is currently dominated by Morgan Stanley. to $9US. client deposits (credit balances). Sources say that prime-brokerage fees may increase significantly. commissions from trading.9-billion in 2009. PrimeBrokerageGuide. and synthetic financing products. The financing and lending spreads.com PrimebrokerageAssociation. that hedge funds will pay on Wall Street record fees next year for brokerage services. profits are usually derived from three sources: spreads on financing (including stock loan).org 65 . by almost a third. 's bankruptcy probably means the end of hedge-fund manager Oak Group Inc. It addresses the firm's exposure to Lehman Brothers in midst of that firms bankruptcy… Dear GLG Fund Investor.com PrimebrokerageAssociation. Amber Capital LP and Bay Harbour Management LLC. has about $6 million in four funds that are stranded. Connecticut-based hedge fund.org 66 . an investment club run by students of the University of Virginia's business school.5 billion Multi-Strategy fund in part because of assets stuck at Lehman  Lehman Brothers Holdings Inc.The Prime Brokerage Book 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. Guest post by Market Folly Permanent Link: Lehman Brothers Bankruptcy Victims . which are each based in New York.  Diamondback Capital Management LLC.  London-based MKM Longboat Capital Advisors LLP said last week it will close its $1. both in London  Darden Capital Management. 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. We wanted to update you about the impact to us arising from the administration proceedings of Lehman Brothers International PrimeBrokerageGuide.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. a Stamford. and RAB Capital Plc and GLG Partners Inc.. after 22 years in business. the directors of these Funds will consider a number of alternatives all of which will be designed to treat all Fund shareholders equally. Since at least the beginning of 2008. 2008 dealing day. in addition to steps taken to significantly reduce our Fund assets held with LBIE. Our assessment of the LBIE exposure is based upon a number of assumptions (including. We have been pressing to begin a constructive dialogue with the Administrators soon. we are evaluating with the directors of our Funds how to address Fund NAV's and the October 1. 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 negotiated to more fully protect any remaining assets and transactions through a series of bespoke arrangements. except in a few cases where there may be a short delay while our estimates are further refined and valued. That said. which will enable us to refine our assessment further. we currently estimate that the combined direct exposure of the GLG Funds to be approximately $95 million.The Prime Brokerage Book (Europe) ("LBIE‖). In total.org 67 . minimize disruption to the investment process. 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. and the insolvency proceedings of other entities in the Lehman Brothers group. We have detailed each Fund‘s potential exposure stemming from LBIE's administration in letters to the investors in those Funds. or less than 1% of GLG's net AUM. 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. 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. until we are able to fully reconcile our information and assumptions with the administrators of LBIE. At this point. We believe NAVs will be published in the normal periods of time. in fact. enable the Funds to continue to invest and permit redemption of shares in the funds.com PrimebrokerageAssociation. our estimates could change. PrimeBrokerageGuide. Lastly. In the event that one or more Funds are ultimately unable to publish a timely NAV. The Charlotte.The Prime Brokerage Book If you have any questions. Already. To date. 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. 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. Best Regards. which at onetime was considering buying Lehman as the investment firm was lurching towards bankruptcy.org 68 . 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. at least three lawsuits have been filed.com PrimebrokerageAssociation. NC PrimeBrokerageGuide. is mounting a legal challenge to the court‘s hastilyapproved sale of Lehman‘s brokerage arm to Barclays Capital. please feel free to contact your representative with any questions. 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. the most aggrieved of Lehman‘s trading partners is Bank of America. IL. MA. $90K. $51K and $48K.indeed. MA. $84K and $79K.000 within the US. $54K and $51K.000.000100.. the risks of prime brokers PrimeBrokerageGuide. Salary Levels . the average salary in the US is $52. These individuals can make $5.com/salary Prime Brokerage Salaries in the United States are vary in different states. the definition of it. IL. However in NY. $58K. IL and CA these numbers are $61K. Rehypothication Risks. CA the average salary for entry-level prime brokers are much higher and these numbers relatively are $57K. $55K. Rights & Costs Here is a short article about the Rehypothication by prime brokerage firms. For junior prime brokers.Prime Brokers According to www.. The average salary for senior executives is much higher than junior and entry level prime brokers since this number is $80.org 69 . CA relatively are $94K. The average salary for entry-level prime broker in the US is $49.The Prime Brokerage Book 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. Read more.000/month through trading commissions alone. In NY. In the NY. MA.‘‘ according to a lawsuit filed in New York State Supreme Court.com PrimebrokerageAssociation.000 as of recent. What these numbers seem not to include are the monthly commission checks which are cut to successive prime brokerage relationship managers. com PrimebrokerageAssociation..The Prime Brokerage Book using the strategy. But it is rehypothecation which poses the biggest threat to hedge funds. according to current and former executives.org 70 . Read more. pushing down their profitability and pushing up the cost of borrowing. Take away rehypothecation. and to offset this against debts. The main prime brokers were almost completely selffunding. 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. Hedge funds trying to reclaim the rehypothecated assets have found themselves in the queue of general creditors. needing very little access to the balance sheet of their parent bank.. administrators of Lehman‘s London business. and could lead to the biggest changes in the prime brokerage industry. hedge fund managers say. 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. Most of the cash has already gone. likely to get back only a proportion of their money. shifted away from prime brokerages to banks regarded as safer. and banks will have to borrow at far more expensive rates in order to lend to hedge funds. have told hedge funds it is likely to take months to calculate how much is due to whom. PwC. 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. Prime Brokerage Assets from Lehman PrimeBrokerageGuide. thanks to hedge fund cash kept on deposit and the rehypothecation of assets. PwC said it is working ``very closely'' with the U. ``What's the market value of.The Prime Brokerage Book 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.'' said PwC.com PrimebrokerageAssociation. will take ``considerable time'' before returning assets stranded by the world's largest bankruptcy to hundreds of hedge fund clients. in a statement today. GLG Partners Inc. ``This process could take several months. ``If your hedge fund assets have been included with Lehman's. according to PricewaterhouseCoopers. which oversees $24 billion. say.'' Prime Brokerage Services List Here is a short list of prime brokerage services: Lending Securities Hedge Fund Startup Services Accessing local shares abroad PrimeBrokerageGuide..K.'s Financial Services Authority to sort out how much is owed to ``many hundreds of clients'' with securities tied up at Lehman. CQS U. and it's going to have to be written down. Funds with assets at Lehman probably will have to write them down when they report net asset values.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.org 71 . you're in the back of a queue that's quite long. Lehman's bankruptcy administrator in London. $100 million that's owed to you by Lehman? I'd say it's not that great.'' said Laven Partners founder Jerome Lussan. a London-based hedge fund consultant. according to Laven Partners LLP. 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. this year only 63% gave their prime brokers high marks.org 72 .Asset Raising Real Estate Identification or Office Space . a considerable 38% of managers rating their prime brokers as ―poor‖ performers of capital introduction.com PrimebrokerageAssociation. The most notable dissatisfaction is with the prime brokers‘ personal service.The Prime Brokerage Book Cash Management Capital Introductions . The survey also shows that many funds are happy with the cost of their prime brokers. Funds who consider themselves technologically advanced are the most satisfied with their prime PrimeBrokerageGuide. However. In 2007 80% of funds rated the personal service of their prime brokers as either ―good‖ or ―excellent‖. which 16% of the managers said negatively effected the relationship with their prime broker. with only 7% responding ―poor‖. This may be a result of the liquidity crisis. The Prime Brokerage Book brokers. I wasn't sure how widespread of a trend this was but saw this mentioned within an article yesterday as noted below. Asian Prime Broker Growth Trend Here is an interesting article about the growth of prime brokerage services in Asia." says Dominic Hobson. At the same time. 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. "However. In recent years. "It would be surprising if the hedge fund administration industry continues to support such a large number of providers. I didn't know that PrimeBrokerageGuide.." Read more. 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.com PrimebrokerageAssociation. Prime Brokerage + Administration More prime brokerage firms are adding on administration services to help attract and retain clients.. and there is now evidence that a renewed round of consolidation is in the offing.org 73 . the appetite to sell may be offset as well as encouraged by the depressed prices available. the buyers are likely to be different from the banks which dominated the acquisition process in the early years of this century. In any event. head of Prime Finance. many large international managers are doing more business in the region. said Hannah Goodwin.The Prime Brokerage Book growth was so strong for these groups right now.com PrimebrokerageAssociation. and the hedge fund's collateral requirements are netted across all deals handled by the Prime Broker. drawn by its long-term potential. and by charging. Asia Pacific for the U. banking giant. The following services are typically bundled into the Prime Brokerage PrimeBrokerageGuide. 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. in some cases. The Prime Broker benefits by earning fees ("spreads") on financing the client's long and short cash and security positions. 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. Even with tumbling stock markets hammering Asia's hedge fund industry... 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. "That's how aggressive we want to be with this business and how well we think this business is going to develop for us. "We're looking at a 30 to 50 percent growth every year.S. fees for clearing and/or other services. as more global hedge funds set up shop in the region." 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.org 74 ." she told Reuters in an interview. and focused on issues associated with regulatory establishment requirements in the jurisdiction where the hedge fund manager will be resident.The provision of risk analytic technology. certain prime brokers provide additional "value-added" services.A range of consulting / advisory services. * Consulting Services . custody. typically provided to "start-up" hedge funds. Contents * 1 History * 2 Fees * 3 Risks * 4 Sources of Information * 5 List of Prime Brokers PrimeBrokerageGuide.org 75 . and then sublease blocks of space to hedge fund tenants.com PrimebrokerageAssociation. as well as in the jurisdiction(s) where the fund itself will be domiciled.The Prime Brokerage Book package: * global custody (including clearing. sometimes supplemented by consulting by senior risk professionals. 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 lease commercial real estate. which may include some or all of the following: * Capital Introduction . * Risk Management Advisory Services . * Office Space Leasing and Servicing .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. These prime brokers typically provide a suite of on-site services for clients who utilize their space. org 76 . conference access and other products. Through the 1980s and 1990s. and was quickly copied by the dominant bulge bracket brokerage firms such as Morgan Stanley.S. Merrill Lynch. These services worked because they also allowed the money manager to maintain relationships with multiple brokerage houses for IPO allocations. consolidate their positions and calculate their performance regardless of which brokerage firms executed those trades or maintained those positions.com PrimebrokerageAssociation. initially by messenger.S. although various prime brokers did supplement their core equities capabilities with basic bond clearing and custody. best execution. Lehman Brothers. In addition. At this nascent stage. However. portfolio reporting. research. in a centralized master account at their prime broker. In the pre-prime brokerage marketplace.S. portfolio management was a significant challenge. The first non-U. then by fax and today over the web. prime brokerage business was created by Merrill Lynch's London office in the late 1980s. prime brokers supplemented their operational function by providing portfolio reporting. prime brokers have expanded their product and service offerings to include some or all of the full range of fixed income and derivative PrimeBrokerageGuide. consolidated cash management and other services. broker-dealer Furman Selz in the late 1970s. the first hedge fund operation is attributed to Alfred Winslow Jones in 1949. the advent of the prime broker freed the money manager from the more time consuming and expensive aspects of running a fund. hedge funds were much smaller than they are today and were mostly U. the prime broker offers stock loan services. money managers had to keep track of all of their own trades. prime brokerage was largely an equities-based product. all of the hedge fund‘s cash and securities. and Goldman Sachs. Over the years. Fundamentally.The Prime Brokerage Book History The basic services offered by a prime broker give a money manager the ability to trade with multiple brokerage houses while maintaining. The concept was immediately seen to be successful. Bear Stearns. The concept and term "prime brokerage" is generally attributed to the U. domestic long-short equities funds. Additionally. Clients whose market activities are principally fixed income oriented will generally produce less prime brokerage revenue. In practice. prime brokerage has become an increasingly competitive field and an important contributor to the overall profitability of the investment banking business. Therefore. client deposits (credit balances). primarily through loans secured by the long positions of their clients.org 77 . In this regard.com PrimebrokerageAssociation.The Prime Brokerage Book products. 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). and flow business areas of the investment bank. Rather. but may still present significant economic opportunity in the repo. and the client is unable to repay the deficit. as well as foreign exchange and futures products. Fees Prime brokers do not charge a fee for the bundled package of services they provide to hedge funds. which are charged in basis points on the value of client loans (debit balances). As of 2006. client short sales (short balances). trading commissions and fees for the settlement of transactions done away from the prime broker. 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. Risks Prime Brokers facilitate hedge fund leverage. such conditions arise PrimeBrokerageGuide. The financing and lending spreads. 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. futures. As hedge funds have proliferated globally through the 1990s and the current decade. revenues are typically derived from three sources: spreads on financing (including stock loan). foreign exchange (fx). and synthetic financing products such as swaps and CFDs (Contract for difference). make up the vast majority of prime brokerage revenue. The Prime Brokerage Book only in the case of extraordinary volatility or unexpected correlation reversions and are exceedingly rare. was merged into JPMorgan Chase in March. sold PB business to BNP Paribas * Barclays Capital * (Bear Stearns. Hedge Funds and Prime Brokers (Risk Books 2006).org 78 . 2008) * BNP Paribas * Calyon Financial * Citigroup * CIBC World Markets * Credit Suisse * Deutsche Bank * Dresdner Kleinwort PrimeBrokerageGuide. Large prime brokerage firms today typically monitor the risk within client portfolios by either Value at Risk (VaR) or "Rules Based" stress testing. previously one of the dominant prime brokers.com PrimebrokerageAssociation. [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. 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). Other forms of risk inherent in Prime Brokerage include operational risk and reputational risk. The Prime Brokerage Book * Fidelity Investments * Fortis * Goldman Sachs * Interactive Brokers * Jefferies & Company * JPMorgan Chase * Lehman Brothers (Bought by Barclays Capital [US Operations]. Bought by Nomura September. This article advocates a close relationship with the manager. adding a level of PrimeBrokerageGuide.org 79 . 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. Although much can be learned from traditional due diligence. EU. India Branches]) * Merlin Securities (Introduces through JP Morgan and Goldman Sachs) * Merrill Lynch (bought by Bank of America .September. Fortis offers this guide to investment due diligence which goes beyond the initial selection process.com PrimebrokerageAssociation. The article focuses primarily on identifying potential problems by maintaining contact with hedge fund managers and thoroughly looking into the operations. Fortis suggests simply talking with the staff and manager. 2008 [Asia. They suggest that a practical understanding of psychology helps detect the underlying factors that could effect a manager's performance. Goldman Sachs now claims five managing directors of its Asian prime brokerage division. Major firms like Merrill Lynch and Morgan Stanley have struggled to retain their top executives in Asia from rival prime brokerages. the more established Deutsche PrimeBrokerageGuide.org 80 . 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. and prime brokerages are bolstering their capacity in Asia by buying up talented executives from the top firms. has become more and more important for successful prime brokerages. Asia. JPMorgan and CitiGroup are playing catch-up with industry giants by bolstering their prime brokerage units. being the fastest growing hedge funds market. Asia has a vastly expanding hedge fund industry. Meanwhile. and has plans to have another series of major hiring.com PrimebrokerageAssociation. 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.The Prime Brokerage Book transparency for the investor and includes helpful tips for building this relationship. consequently major prime brokerage firms are vigorously competing for clients. The two biggest prime brokers.The Prime Brokerage Book Bank. 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. 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.com PrimebrokerageAssociation.org 81 . smaller prime brokerage shops are becoming more attractive than the largest firms. While other major firms try to catch up by buying up talent from rivals. Morgan Stanley. Morgan Stanley and Goldman Sachs are securing their dominant positions in prime brokerage. Goldman Sachs and Morgan Stanley. as well as superior technology and support capabilities. boutique primes take on these clients. As major brokers reduce their lessprofitable hedge fund accounts. Another opportunity for boutiques is that the big firms are cutting back on staff. some boutique prime brokers have benefited. making it easy PrimeBrokerageGuide. Prime Brokerage Book Review I'm reading a book right now on prime brokers called Hedge Funds and Prime Brokers. 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. This is the only book I have been able to find on prime brokerage. Merrill Lynch and Goldman Sachs are battling for dominance over the prime brokerage industry. As hedge funds look out for their best interest. Many average-size funds are not given the attention from big firms that the smaller prime brokers promise. Prime Brokerage New York / Evolution The prime brokerage industry is constantly evolving adapting to new client demands. Many of these veterans bring some clients with them too.The Prime Brokerage Book to attract seasoned talent to join the smaller firms. by traditional investment managers. 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. A recent FINalternatives survey revealed that over a third of all hedge funds rated their prime broker's capital capabilities as "poor". This is leading prime brokerage The main point of change that this article pointed to was the PrimeBrokerageGuide. 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.com PrimebrokerageAssociation. but it has also hurt their capital introduction capabilities. which slightly reshape their industry. opportunities and regulatory environments. and as long as this neglect continues. The credit crisis has in many ways helped boutique prime brokers. 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.org 82 . boutique prime brokers will. Prime Brokerage Survey A Recent Prime Brokerage Survey FinAlternatives just released a prime brokerage survey. reporting and risk management and de-emphasizing capital introduction and leverage. The survey digs into the quality of PrimeBrokerageGuide.equivalent to $1.com PrimebrokerageAssociation.org 83 ." 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. it contains some interesting details on how satisfied hedge funds are with their prime brokerage service providers. "According to a recent Vodia Group survey traditional asset managers have 3 per cent of their asset base . driving greater demand for prime brokerage services.in leveraged investments. Every year the field becomes more competitive. with 86 per cent of major asset managers expecting to run 130/30s by mid-2009.The Prime Brokerage Book widespread interest in hedge fund‘s clients to service clients who also run 130/30 and long only portfolios as well." "But traditional asset management clients are forcing prime brokers to adapt their business model. Vodia said.95trn .48trn in 2012. The firm predicts that leveraged assets will increase from $2. and most hedge funds need help marketing and raising capital. These factors will push margins lower and increase operational requirements in the prime brokerage business.65trn today to $4. placing greater emphasis on custody. com PrimebrokerageAssociation. a 15% increase over 2006 (reported by TABB Group). As Bear collapsed in March 2008. 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. For years the prime brokerage industry has been dominated by three firms—Goldman Sachs. UBS (7%. now it is given a quick entry into prime brokerage as long as Bear's hedge fund clients are successfully locked down. The fight for market share is even more intense among the industry's top players. which collectively owned about two-thirds of the market. Goldman (18%. $136 billion). UBS. including JPMorgan Chase. other major financial services firms are stepping up their prime brokerage efforts. Credit Suisse and BNP Paribas. and Morgan Stanley and Goldman Sachs struggle to maintain their dominance in the industry.org 84 . in terms of market share based on assets. $119 billion). execution and personal service received from their prime broker. Here is the full report and prime brokerage survey. $25 billion). JPMorgan Chased was only ranked eighth in the Lipper survey with just a 2. followed by Bear (21%. Morgan Stanley and Bear. Another interesting point was that poor personal service was the #1 reason that a hedge fund manager would switch prime brokers. 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).The Prime Brokerage Book capital introduction.3% market share. 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. Deutsche Bank. $47 billion) and Credit Suisse (4%. BNP Paribas bought Bank of PrimeBrokerageGuide. " (full article). 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. thus was instantly made one of the largest prime brokers in the U. To Join the PBA Click Here PrimeBrokerageGuide. so if a new company wants to come in and do business with us. The recent turbulence in the prime brokerage industry also accelerated the trend of hedge funds moving away from replying on just one prime broker. Now more and more hedge funds are adding prime brokers to limit counterparty risk since the fall of Bear (ref). Traditionally hedges funds are unwilling to switch prime brokers or increase the number of their prime brokers (TABB report). As Michael Guarasci. serves a source of inter-industry networking and works to improve the overall image of the prime brokerage industry to the general public. This created considerable opportunity for new players to enter or existing players to take a bigger piece of the market share. "We have long-standing relationship with our prime brokers. partner at hedge fund Indus Capital Partners said. It's not easy to switch prime brokers. it may not get anywhere because we're pretty happy with our service.org 85 .com PrimebrokerageAssociation. as pointed out in an article by Merrill Lynch: "The multi-prime broker environment overcoming the challenges and reaping the benefits" (download the pdf).S.The Prime Brokerage Book America's equity prime brokerage division that was ranked the sixthlargest in the country by assets at the end of 2006 by Lipper HedgeWorld. 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.org 86 . there is nothing engaging enough that will convince investors to look past those two facts.offer capital PrimeBrokerageGuide. 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. 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 . 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.com PrimebrokerageAssociation. If they are hiring 10 year industry veterans or fresh college graduates this can tell you a bit about their approach as well.The Prime Brokerage Book 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. hedge funds are starting to look at migrating some of their business.. 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. Well. something that would have until this weekend seemed laughable. newsletter development. For most firms.com PrimebrokerageAssociation. Until now. it appears that prime brokerage clients of Morgan Stanley and Goldman have started getting jitters. Goldman and Morgan Stanley were the prime brokers firms wanted to be with. Read more here. 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..org 87 . With Lehman Administrators confirming that there would be no early return of Prime Broking client assets. etc. Permanent Link: US Prime Brokerage PrimeBrokerageGuide. marketing material scrubbing.The Prime Brokerage Book 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. They want to provide this service to everyone possible but by nature only 10-25% of all clients really qualify for the service. The best prime brokers will often help with pre-marketing activities such as operational and risk assessments. since those brokers didn't accept "dodgy" accounts. to the delight of other prime brokers with banking parentage. an account with GS or MS was a seal of approval that they could show to investors. They dominated the prime broking market and had their choice of which clients to accept. while caring greatly about the level of service and any capital introduction services which may exist while working with a certain prime brokerage shop.org. so they can acquire the leverage needed for their strategies. 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. An Explanation | Prime Brokerage Derivatives One of key functions of prime brokers is to provide financing to its hedge fund clients.The Prime Brokerage Book Prime Brokerage Chicago I recently interviewed a prime brokerage partner in Chicago. Since with leverage can come PrimeBrokerageGuide. Prime Brokerage Clearance Services Clearing is one of the many services prime brokerage firms offer.org 88 . 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 .com PrimebrokerageAssociation. 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. and the prime broker gains interest on the debt. the hedge fund holds a portfolio with a value of $100. PrimeBrokerageGuide. This way the hedge fund achieves a leverage of 4 to 1 (assuming only long positions). "Leverage is being closely watched. The prime broker sets up an account advised (or managed) by hedge fund manager who has trading discretion. The first is by providing margin financing. for obvious reasons." (See article from MarketWatch) There are two major methods that a prime broker can lend leverage to a hedge fund. and charges the interest in the form of a swap payment received from the hedge fund. For example. using $25 million of its own assets and $75 million of margin debt provided by the prime broker. "…the amount of leverage being utilized is being reviewed much more carefully than it has been in the past. and is usually termed "synthetic prime brokerage". the prime broker requires the hedge fund to post $25 million of equity. While the structure of this form of financing varies. on a portfolio by portfolio (or client by client) basis. the leverage used by the fund is determined by the amount of margin on the swap required by the prime broker. The account is advised by the hedge fund manager. So different from the first method. in this case even though hedge fund manager trades the account to implement the hedge fund's strategy.com PrimebrokerageAssociation. the hedge fund borrows some portion of the security's value from the prime broker. The prime broker then enters into a total return swap with the hedge fund. Due to the recent credit crunch. which advises hedge funds on borrowing strategies. managing principal of Vodia Group. the prime broker has an account with $100 million of its own assets. As margin for the swap. thereby providing leverage of 4 to 1. the portfolio actually belongs to the prime broker. Through this synthetic prime brokerage service." said Josh Galper. where the hedge fund is the counterparty to a total return swap on that account. The alternative way of extending leverage is through the OTC derivatives. To follow the example above. one approach takes the form of a managed account swap.The Prime Brokerage Book increased risk.org 89 . in other words. Morgan Stanley. The company has recently been selected to assist ABN AMRO by providing technological enhancements for use in their developing FX prime brokerage service. Source PrimeBrokerageGuide.com PrimebrokerageAssociation. is headquartered in San Mateo. Credit Suisse First Boston has added a customized risk assessment and trading system to its prime brokerage unit.with equity swaps used side by side with stock loan and other services for particular parts of their portfolios. to provided their Advent‘s Geneva® to help in management of Jefferies‘ growing prime brokerage offerings. Chicago. Source In a bid to gain market share in the ultracompetitive prime brokerage market. 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. global head of prime services.The Prime Brokerage Book Many hedge funds use synthetic prime brokerage service as part of a full service prime brokerage agreement .org 90 . and Societe Generale. according to an article by HedgeWeek. he said. Customers include ABN AMRO. Traiana. according to Philip Vasan. The new system will allow CSFB to provide its institutional clients with risk assessment across their holdings in the equity. CSFB. Advent Software has been selected by Jefferies & Company Inc. London. with offices in New York. JP Morgan Chase. foreign exchange and derivatives markets. Deutsche Bank. CSFB has been considering systems to accomplish this for more than a year. fixed income. and Tel Aviv. a top tier global investment bank and institutional securities firm. AIG Trading.. 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. California. Recently. org 91 . "…the amount of leverage being utilized is being reviewed much more carefully than it has been in the past. in this case even though hedge fund manager trades the account to implement the hedge fund's strategy.com PrimebrokerageAssociation. So different from the first method. the hedge fund holds a portfolio with a value of $100. on a portfolio by portfolio (or client by client) basis. The prime broker then enters into a total return swap with the hedge fund. in other words. using $25 million of its own assets and $75 million of margin debt provided by the prime broker. The alternative way of extending leverage is through the OTC derivatives. While the structure of this form of financing varies. and charges the interest in the form of a swap payment PrimeBrokerageGuide. This way the hedge fund achieves a leverage of 4 to 1 (assuming only long positions). the hedge fund borrows some portion of the security's value from the prime broker." said Josh Galper. "Leverage is being closely watched." (See article from MarketWatch) There are two major methods that a prime broker can lend leverage to a hedge fund. the portfolio actually belongs to the prime broker. The first is by providing margin financing. The prime broker sets up an account advised (or managed) by hedge fund manager who has trading discretion. so they can acquire the leverage needed for their strategies. for obvious reasons. and is usually termed "synthetic prime brokerage". managing principal of Vodia Group. Due to the recent credit crunch. one approach takes the form of a managed account swap. which advises hedge funds on borrowing strategies. 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. and the prime broker gains interest on the debt. Since with leverage can come increased risk.The Prime Brokerage Book An Explanation | Prime Brokerage Services of Hedge Funds One of key functions of prime brokers is to provide financing to its hedge fund clients. For example. Goldman Sachs. securities lending.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. To follow the example above. the prime broker requires the hedge fund to post $25 million of equity. Ranking of the prime brokers in 2007 according to the aforementioned criteria can be found PrimeBrokerageGuide. reporting and reporting technology. thereby providing leverage of 4 to 1. the leverage used by the fund is determined by the amount of margin on the swap required by the prime broker. followed by client service. Many hedge funds use synthetic prime brokerage service as part of a full service prime brokerage agreement . The research shows that the largest prime brokers by total 2006 assets are Morgan Stanley. capital introduction and business consulting. financing. The account is advised by the hedge fund manager.The Prime Brokerage Book received from the hedge fund. where the hedge fund is the counterparty to a total return swap on that account. 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. Through this synthetic prime brokerage service. the prime broker has an account with $100 million of its own assets. UBS and Credit Suisse. Bear Stearns. As margin for the swap.com PrimebrokerageAssociation. Surveys by Alpha Magazine indicate that the most important aspect of service in prime brokers was operations. trade execution and trading technology.org 92 . 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. Deutsche Bank."). Guest post by Yifei Huang Prime Brokerage Fees Prime brokers don‘t charge fees for many of the services they provide to hedge funds. which are charged in basis points on the value of client loans (debit balances). global head of Comas. client short sales (short balances).com PrimebrokerageAssociation. "there was likely to be a concentration of prime broking business with a smaller number of large service providers". Therefore. after the financial turbulence in the past six months. BNP Paribas. Credit Suisse and Citigroup (more). However. profits are usually derived from three sources: spreads on financing (including stock loan). and fees for the settlement of transactions done away from the prime broker. said Mehraj Mattoo. 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. commissions from trading. 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. and synthetic financing products. client deposits (credit balances). Commerzbank's fund of hedge funds unit.The Prime Brokerage Book on their webpage. that hedge funds will pay on Wall Street PrimeBrokerageGuide. it is said.org 93 . The financing and lending spreads. Instead. and Goldman Sachs Group Inc.The Prime Brokerage Book record fees next year for brokerage services.9-billion in 2009. to $9US. 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) PrimeBrokerageGuide. City & Financial: The Future of Prime Brokerage (One Day Conference) Offered in 2006(detail) and 2007(detail).com PrimebrokerageAssociation. Sources say that prime-brokerage fees may increase significantly.org 94 . by almost a third. This business is currently dominated by Morgan Stanley. both conferences had Timothy Spangler as the chairman. 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). Hear how Prime Brokerage has effected the modernization of trading.com PrimebrokerageAssociation. Hear what investors needs are with respect to these services and what dealers can do to meet these needs. Fink has joined in order to focus on prime brokerage sales. for high net worth investors and investors for institutions. convertible and international securities.org 95 . 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. Along with this they provide institutional brokerage. Enslein Jr.The Prime Brokerage Book "Listen to senior operations professionals discuss the significance of Prime Brokerage services to investors. securities research and asset management. operations and technology. is a global investment bank and institutional securities firm who provides capital market and financial advice services to its clients. high yield. Inc. Source Linedata Services is a leading global provider of the latest in the financial technologies market. Source Jefferies & Company. to join their company as Senior Vice Presidents." (download pdf file: "Prime Brokerage: The Evolving Landscape") by Yifei Huang BANK PRIME BROKERAGE OFFERINGS Jefferies Prime Brokerage Jefferies & Company Inc. Robin H. A third. Jefferies is also a leading provider in equity. and Jeffery M. Their job will be to focus on capital introduction. McCarthy. 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 has expanded and is now officially a part of prime brokerage business. Recently. The company has been adding to its staff PrimeBrokerageGuide. Robert E. has recently hired Senior professionals. prior head of technology to name a few. former Senior Salesman. R&M Surveys being an independent market research administration that specializes in investor services industry. to communications. It is now attracting hedge fund businesses because of its focus on the concerns of prime brokers under the thread of market collapse. They are now focused on providing some services offered by prime brokers to its single-strategy hedge fund clients. and absolute return fund managers as well as private equity partners. Source HSBC Securities Services (HSS) is soon to provide alternative fund services with in the nation of Australia. 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.com PrimebrokerageAssociation. These heads will hold similar position in Jefferies heading the new development of the company. is Europe's biggest bank by market value.The Prime Brokerage Book and implementing the talented of its previous affiliate Bank of America. These services would include foreign exchange and treasury products. fund of hedge fund managers. HSS is a part of the Bank that has grown greatly in recent years and it now has 382 billion PrimeBrokerageGuide. Source HSBC Holdings Plc. as well as the quality of employees and the service value for the money. in addition to the traditional administration and custody functions.org 96 . investor servicing and financial reporting to hedge fund managers. They are now offering local fund accounting. and John Kunze. The company is now in cooperative talks with various hedge funds with more than $100 billion in assets. Some wellknown ones include Penn Miller-Jones. The questionnaire for the survey ranked various providers on 34 aspects of the services they provide from services such as transaction processing. securities lending. and exchange services within the nation of Canada. and capital introduction. Source CIBC World Markets is a leader in prime brokerage in Canada. Source CIBC Prime Brokerage Some notes and stories related to prime brokerage services offered by CIBC. research. Source PrimeBrokerageGuide. Along with this it has reached first place in both leading and cross-border clients. among other services. 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.com PrimebrokerageAssociation. Russell Investments Group provides a wide variety of quality investment products. securities lending. Being a fine partner. They provide services such as multi currency accounting. CIBC Mellon recently informed the public of its reappointment by Russell Investments Canada to provide services for them as well. It is a Canadian provider of Prime Brokerage services for alternative investment managers. A superior leader in providing asset servicing. Recently CIBC Mellon Global Securities Services announced it reached top rank in the Canadian sub-custody. securities lending. as relayed by leading clients from Global Custodian Magazine‘s 2008 Agent Banks. and exchange services in Canada.The Prime Brokerage Book Australian Dollars in funds under custody as of July 2008. reporting. CIBC Mellon Global Securities Services Company is a leading provider of finance services sizeable institutions and corporations. Source CIBC Mellon is jointly owned by Canadian Imperial Bank of Commerce and The Bank of New York Mellon Corporation.org 97 . information delivery. Barclays snapped up the Lehman unit after Lehman went into bankruptcy in mid-September.1. it still adds to the continued exodus of staff on Wall Street. it agreed to pay $250 million for Lehman‘s investment banking and capital markets operations in North America. Although the cut seems small given the more than 50. ―The proposed acquisition of Lehman Brothers North American investment banking and capital market operations accelerates the PrimeBrokerageGuide. JPMorgan Chase is planning to lay off about 3. Some of the staff found other jobs at Barclays the source said. The cuts were across both firms and all roles where there was overlap between Barclays and Lehman. including its prime brokerage.com PrimebrokerageAssociation.08) Barclays cut its prime brokerage staff as it finishes integrating the Lehman business it acquired. Barclays also agreed to pay another $1. according to Bloomberg.000 people and Goldman Sachs is planning a 10% cut. About 100 people or 30% of the staff in the prime brokerage unit were let go.5 billion for Lehman‘s Times Square headquarters and two data centers in New Jersey. which has about 10. But yesterday.000 that Citi recently said it was laying off. just days after effectively forcing Lehman into bankruptcy.The Prime Brokerage Book Barclays Prime Brokerage Here is a collection of stories related to Barclays Prime Brokerage Services: Resource #1: (12. New York-based Lehman filed for Chapter 11 on Monday after talks with Barclays about buying the whole of Lehman broke down. source Resource #2: Barclays has agreed to buy Lehman Brother‘s North American investment-banking group. according to someone familiar with the matter.org 98 .000 employees. as the market perception of that firm began to worsen.org 99 ..com PrimebrokerageAssociation.The Prime Brokerage Book execution of our strategy of diversification by geography and business in pursuit of profitable growth on behalf of our shareholders. in what is being viewed as a massive flight to safety.S. ―This is a wonderful outcome for a great number of our employees that will preserve and strengthen our terrific franchise. write Greg Farrell and Henny Sender in New York .. prime brokerage business had been migrating away from Lehman Brothers. PrimeBrokerageGuide. In recent weeks.‖ Lehman CEO Richard Fuld said. Lehman said in a statement. Traders at JPMorgan Chase. in particular increasing the percentage of Barclays earnings sourced in North America. Citigroup. 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.. Read more here.‖ Barclays CEO John Varley said. Barclays will also ―immediately commence discussions‖ about buying Lehman operations outside of the U. 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. The Eurekahedge Asian Hedge Fund Index is down 21. Baker's departure comes a week after Morgan Stanley confirmed additional worldwide job cuts. The firm has already cut about 10% of its work force this year. as well as 9% in asset management. has been hurt by a worldwide hedge-fund slump. the bank has cut around 4. the hedge-fund industry has been especially vulnerable to a focus on stocks and a tendency to go long. In Asia.6% so far this year.The Prime Brokerage Book But after Lehman's collapse into bankruptcy protection on Monday. one of the two largest in the Asia. bringing its total staff to about 46. a company spokesman confirmed Wednesday. Morgan Stanley's prime brokerage operations. the gradual ebb of prime brokerage business away from the independents rose to a flood. Morgan Stanley's prime brokerage.com PrimebrokerageAssociation. 31.. filed for bankruptcy protection in mid-September. which includes prime brokerage. The hedge-fund industry has been struggling against trailing performance and a rising tide of redemptions. in particular.. were hit after Lehman Brothers Holdings Inc.17. along with Merrill Lynch's decision to be acquired by Bank of America.500 employees. Read more. which manages mutual funds and other investment instruments. 2008. but declined to comment further. Since June 2007.org 100 . is leaving the firm. Morgan Stanley Prime Brokerage Below are a series of resources related to Morgan Stanley's Prime Brokerage business: Resource #1: (11. It said it would reduce 10% of its staff in institutional securities. the head of Morgan Stanley's prime brokerage in Asia.500 as of Aug. Concerns about the stability of investment banks PrimeBrokerageGuide.08) Kurt Baker. Mr. ―Stu had been instrumental in helping to build our prime brokerage business into the recognized market leader today.D. He will be based in New York and report to Rich Portogallo. ―We are thrilled to have him back. 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. Mr. Head of the U.The Prime Brokerage Book caused some hedge-fund clients to move assets. Global Head of Equities and CoHead of Institutional Sales and Trading at Morgan Stanley.S. PrimeBrokerageGuide. Hendel. Mr. He graduated from Wesleyan University in 1980.‖ said Jerker Johansson.S. Hendel rejoins Morgan Stanley from Eton Park. 48. content.‖ Prior to joining Eton Park. Hendel will rejoin Morgan Stanley in early 2007. Prior to that. ―Stu's innovation. He held a number of senior management positions in Prime Brokerage from 1993 to 2004. Equity Division and Global Equity Financing Services. where he served as the Chief Operating Officer since that firm was organized in 2004.‖ said Rich Portogallo. In this role. most recently serving as Co-Head of U. Source Resource #2: Stu Hendel will rejoin the Firm as Global Head of Prime Brokerage. Hendel received his J. 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. from Cornell Law School 1983 where he served as business manager of the Law Review. Hendel spent 15 years at Morgan Stanley. Hendel will also work closely with senior management in the Equities and Fixed Income divisions on defining and executing strategic direction for the group. His experience and skill make him perfectly suited to continue our momentum in this business. Mr. Prime Brokerage.com PrimebrokerageAssociation. Hendel worked in the legal division of Morgan Stanley from 1989 to 1993. Mr. ―We are delighted that Stu Hendel has chosen to return to Morgan Stanley.org 101 . Mr. . such as the computer-driven strategies that seek to profit from small price discrepancies. 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." That review is especially intensive for hedge funds pursuing strategies that involve trading securities that aren't very liquid. 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. or that rely on the massive use of borrowed money." says George Kellner. DiLeo.The Prime Brokerage Book 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. Such securities have become "dead-end collateral" in Wall Street parlance. PrimeBrokerageGuide. Read more. But in recent months. 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. creating and multi-priming than there was over the previous 3 years.com PrimebrokerageAssociation. "They are reviewing many of their relationships. such as convertible bonds. "Their ability to leverage themselves has been affected by their new reiteration. such strategies appeared liquid and borrowing was cheap. During the bull market..08) Great piece here by the FT about how Goldman Sachs is booting some of their hedge fund clients off of their platform. In the last 9 months there has been more prime brokerage account closing.org 102 . Here's a short story related to this topic: Resource #1: (11. founder of hedge fund Kellner.6. 5 billion for the New York headquarters and two data centers.The Prime Brokerage Book Resource #2: The spiraling downward of financial confidence has sprouted up in various areas. and sent a letter to 60 of its fellow pension funds urging them not to lend. 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. Credit Suisse Group AG (CS) and JPMorgan Chase (JPM) ―are picking up Morgan Stanley‘s clients.‖ The article notes that Deutsche Bank AG (DB). Citigroup (C). for $1.K.‖ DJ notes that Cali‘s teachers pension system yesterday stopped lending shares of both stocks. or plan to do so.. the article suggests: Lehman has frozen ―billions‖ in hedge fund money inside its prime brokerage unit since it filed bankruptcy on Monday. three days after abandoning plans to buy the entire firm . The London-based bank plans to raise at least 600 million pounds ($1. will acquire the North American investment-banking business of bankrupt Lehman Brothers Holdings Inc. 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). the U.1 billion) in a stock sale to help fund the PrimeBrokerageGuide.75 billion.. hoping to ―limit short-selling‖ of the stocks. as saying ―We don‘t want to inadvertently contribute to the instability of these companies or the market. The wire quotes Clark McKinley.‖ The threat to hedge funds‘ assets is real. Lehman/ Barclays Prime Brokerage Services Barclays Plc.com PrimebrokerageAssociation. Read more. a CALPERS spokesperson.biggest bank. Pension funds try and strangle short sales But some are fighting the good fight.org 103 . The article cites ―a person with direct knowledge of the matter. apparently. Bloomberg reports that hedge funds making up ―less than 10%‖ of Morgan Stanley‘s prime brokerage balance are withdrawing their assets from the firm. it said today in a statement.'s third. 5 billion. adds to BNP Paribas's existing relationships with major hedge funds in the region.org 104 . trading and research businesses.08) BNP Paribas SA. The new contract with CQS. merger advisory and prime brokerage units." Read more.K. "The purchase includes the equities and fixed-income sales. ``We have prime brokerage relationships with three or four of the PrimeBrokerageGuide. won prime brokerage business in Asia with hedge fund CQS (U..The Prime Brokerage Book deal and may buy other Lehman units.com PrimebrokerageAssociation. according to Talbot Stark. Barclays said. commodities and foreign exchange.) LLP as it seeks to lure clients in the region from rivals. global head of BNP Paribas hedge fund relationships. 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. He declined to name other existing clients.16.. France's biggest bank. a Londonbased hedge fund manager that has an office in Hong Kong and oversees about $7. securities lending and secured financing to more than 500 hedge funds and has 320 employees. global head of BNP Paribas hedge fund relationships. securities lending and financing for assets. Source Resource #2: BNP Paribas SA. ``That acquisition now looks timely in these markets as people are in the middle of a flight to quality. 43. ``Foremost on people's minds is ensuring that wherever they decide to put assets. France's biggest bank. BNP Paribas expanded its services for hedge funds in June. Massachusettsbased Tabb Group LLC report in May as the two biggest prime brokers worldwide. rattled confidence in securities firms.'' Stark. custody.'' Stephen Pearson.'s prime brokerage unit. when it bought Bank of America Corp. they will be secure. filed for bankruptcy on Sept.'' 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.com PrimebrokerageAssociation.'' Lehman won't return ``billions'' of frozen prime-brokerage assets ``in the short term.The Prime Brokerage Book market leaders in Asia that are outperforming their peers and look to be longer-term survivors in the Asian hedge fund market. the company said. The unit provides record-keeping. Prime brokerages offer hedge funds services such as clearing. They also introduce fund managers to investors. a partner at PrimeBrokerageGuide. said in a telephone interview yesterday.'' said Talbot Stark. said it got a ``flood'' of clients at its prime brokerage since Lehman Brothers Holdings Inc. in an interview today. and Morgan Stanley were ranked by a Westborough. and Bear Stearns Cos. ``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.org 105 . Goldman Sachs Group Inc. 15. It is an important advantage for clients to partner with a bank like BNP Paribas . We believe it is a low risk. ― Chase Prime Brokerage PrimeBrokerageGuide.com PrimebrokerageAssociation. Yann Gerardin. Combining the Bank of America prime brokerage business with our global platform and leading derivatives business creates a prime brokerage business of choice. announced on June 10 of this year.org 106 . While Stark wouldn't specify how much money hedge funds have moved to BNP Paribas. the $24 billion hedge fund that started as a unit of Lehman 13 years ago. The transaction involves the transfer of client relationships.. said: ―We are thrilled the deal has closed on schedule. with a AA+ credit rating and global reach‖. Read more. The deal. service oriented business.. low capital consumption. Head of Equity and Commodity Derivatives for the Americas. this week said some ``residual'' trades with Lehman didn't clear before it filed the biggest bankruptcy in history. GLG Partners Inc.BNP Paribas is pleased to announce it has completed the acquisition of Bank of America's equity prime brokerage business. 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. said yesterday. said: ―The strategic fit of this acquisition is excellent. brings more than 500 clients and over 300 employees to BNP Paribas Corporate and Investment Banking. The equity prime brokerage business provides a wide range of services to hedge funds and mutual funds. Global Head of Equity and Commodity Derivatives. Our goal was to move the business over seamlessly for clients and employees and we have achieved this.The Prime Brokerage Book PricewaterhouseCoopers. employees and technology systems. Resource #3: The FINANCIAL -.. Todd Steinberg. administrator for the Lehman bankruptcy. " Read more. 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. among others. but also European.org 107 . as the market perception of that firm began to worsen. said: "We have stopped stock lending in several American. Citigroup. Traders at JPMorgan Chase. banks whose shares face the most downward pressure.com PrimebrokerageAssociation.. 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. write Greg Farrell and Henny Sender in New York .The Prime Brokerage Book 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. from short-sellers. in what is being viewed as a massive flight to safety. Permanent Link: Chase Prime Brokerage Citigroup Prime Brokerage Here is a collection of publicly available articles related to PrimeBrokerageGuide. prime brokerage business had been migrating away from Lehman Brothers.. manager of Europe's biggest pension fund. In recent weeks. But after Lehman's collapse into bankruptcy protection on Monday. APG. org 108 . Five of those took severance packages. Hedge Fund Alert reports. 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.09) Citigroup's Andrew Hill. securities lending. It remains committed to other services including clearing. Traders at JPMorgan Chase. He will also oversee Citi's US prime brokerage business. In his new role. who currently coheads the firms prime brokerage sales business in Japan. and will continue to oversee prime finance sales for Japan.The Prime Brokerage Book Citigroup prime brokerage: Resource #1 (2.08) Citigroup has reportedly cut 15% of its Citi Prime Finance staff. Hill will work towards building the roster of hedge fund clients in Southeast Asia and India. is being relocated to Singapore. a Citigroup spokesperson confirmed to IDD. prime brokerage business had been migrating away PrimeBrokerageGuide. Citigroup. source Resource #2: (12. Hill's specific focus will be on equity and fixed income prime brokerage. the rest were laid off. including 14 members of its New York office. in what is being viewed as a massive flight to safety. In recent weeks. capital introduction and execution. who oversees the foreign exchange prime brokerage business for Citi in Asia. 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. He will work alongside Alex Knight.com PrimebrokerageAssociation. As part of the downsizing. Citi‘s prime brokerage group will no longer offer business consultancy services to hedge funds.6.4. write Greg Farrell and Henny Sender in New York . APG. banks whose shares face the most downward pressure. In recent weeks..com PrimebrokerageAssociation. along with Merrill Lynch's decision to be acquired by Bank of PrimeBrokerageGuide. among others. the gradual ebb of prime brokerage business away from the independents rose to a flood." Read more.org 109 . But after Lehman's collapse into bankruptcy protection on Monday. but also European. 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. Citigroup. said: "We have stopped stock lending in several American. manager of Europe's biggest pension fund. as the market perception of that firm began to worsen. 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.. as the market perception of that firm began to worsen. from short-sellers. write Greg Farrell and Henny Sender in New York . along with Merrill Lynch's decision to be acquired by Bank of America. But after Lehman's collapse into bankruptcy protection on Monday. Traders at JPMorgan Chase.The Prime Brokerage Book from Lehman Brothers. prime brokerage business had been migrating away from Lehman Brothers. The Prime Brokerage Book America. from short-sellers. Consolidated collateral PrimeBrokerageGuide. The transaction also involves the transfer of client relationships. announced on June 10.com INDUSTRY TERMS AND DEFINITIONS Derivatives Prime Brokerage Prime brokerage clients often benefit from increased capital efficiency through margin netting of entire portfolios. which provides services to hedge funds and mutual funds. global head of equity and commodity derivatives at BNP Paribas. manager of Europe's biggest pension fund. The deal. APG. said: "We have stopped stock lending in several American. employees and technology systems. 2008. with an AA+ credit rating and global reach. among others. but also European..com PrimebrokerageAssociation.org 110 ." Source Press@TriadSecurities. said: "The strategic fit of this acquisition is excellent. Yann Gerardin. brings more than 500 clients and over 300 employees to BNP Paribas corporate and investment banking." 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. banks whose shares face the most downward pressure. the gradual ebb of prime brokerage business away from the independents rose to a flood. It is an important advantage for clients to partner with a bank like BNP Paribas. Combining the Bank of America prime brokerage business with our global platform and leading derivatives business creates a prime brokerage business of choice.. they deliver the highest level of service. Hedge Fund Hotels Certain prime brokers lease commercial real estate.com PrimebrokerageAssociation. The interest rate derivatives prime brokerage infrastructure allows clients to trade swap and derivative structures in many currencies. technology. Global Custody Prime Brokerage Term PrimeBrokerageGuide. These prime brokers typically provide a suite of on-site services for clients who utilize their space. And with a single point of contact and the full back up of a dedicated team. and then sublease blocks of space to hedge fund tenants. data and accounting management. Prime Brokerage Client Service With 24-hour global teams in place. Credit derivatives prime brokerage offers the capability to trade directly or on give-up across single name.The Prime Brokerage Book payment and one consistent valuation source provide operational efficiencies. operations.org 111 . index and correlation products-in all regions. technology and operational professionals. clients benefit from the support and insight of experienced teams who provide innovative solutions based on an in-depth understanding of clients' objectives. 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. An experienced onboarder leads clients through the integration phase and directs a team of documentation. Performance Analytics Risk Exposure. Their system has the capacity to perform multiple customized and ad hoc analyses. The clients also benefit from receiving timely information throughout the day on securities and sectors of interest. including those that demonstrate transparency to investors.The Prime Brokerage Book This service includes clearing. including VaR.com PrimebrokerageAssociation. The clients benefit by receiving access to conferences and research reports from institutions with which the prime brokers have relationships. 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. feed directly into client systems. The application also pulls analytics from third party systems. stress tests. Data extracts and hardcopy reports.org 112 . management of risk exposure. sensitivities to multiple risk factors and ―on-the-fly‖ risk analyses of new portfolios. custody. Portfolio Analytics Prime brokers offer a comprehensive suite of applications to measure PrimeBrokerageGuide. 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. 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. risk exposure management. Real Time P & L Through many prime brokerage technology systems. performance and P&L. listed or OTC derivatives. as well as in the jurisdiction(s) where the fund itself will be domiciled. they constantly research new technologies and hedge fund services to provide effective solutions for their clients. This includes the following: An exhaustive set of financial reports including trades. maturing deals. typically provided to "start-up" hedge funds. Through continued investment in technology. and including hybrid and structured instruments. positions. or filters.com PrimebrokerageAssociation. They provide robust. risk exposure. leading edge technology to meet the ever-changing needs of the clients. stock lending. flows.org 113 . A web-based solution. Customized Technology & Reporting They provide hedge fund managers with portfolio reporting needed to effectively manage money. PrimeBrokerageGuide. Recognizing the challenges associated with building an institutional funds management business.The Prime Brokerage Book risk. A consolidated view of entire portfolio. they provide clients with customized data delivery and reporting as well as end-to-end workflow solutions to deliver straight-through processing. cash statements. and the format of files. corporate actions. provide comprehensive business and technology consulting services for hedge funds of varying size and strategy. gathering on the same reports cash. for both equity and fixed income products. Hedge Fund Consulting Prime brokerage firms often offer a range of consulting / advisory services. and focused on issues associated with regulatory establishment requirements in the jurisdiction where the hedge fund manager will be resident. customizable to fit personal needs preset the user profile and choose their own daily set of reports. sometimes supplemented by consulting by senior risk professionals. 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.org 114 . 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.They offer risk management expertise to tailor various margining methodologies to best suit clients' investment strategies and risk intolerance. Financing facilitates leverage of client assets. Many arbitrage strategies are dependent for their success on being able to source stock loan. They work closely with clients to better understand their financing needs and deliver tailored solutions. This includes Portfolio Risk Margining . they can view a client's entire prime brokerage portfolio and optimize utilization of margin by recognizing off-setting positions to help manage risk.com PrimebrokerageAssociation. PrimeBrokerageGuide. The quality and depth of the stock lending service is therefore a key differentiating factor between prime brokers.The Prime Brokerage Book Financing of Trades and Positions Prime brokers offer an effective framework to facilitate funding needs at highly competitive rates. Risk Management Advisory Services The provision of risk analytic technology. As prime brokers. com PrimebrokerageAssociation.The Prime Brokerage Book Additional Prime Brokerage Resources Below please find a collection of miscellaneous prime brokerage articles. resources and videos: Prime Brokerage Sales Capital Introduction Team What is Prime Brokerage? Prime Brokerage Products & Prime Brokerage Business Services Q & A Prime Brokers Association Research Services for Hedge Prime Brokerage New York Funds Lehman Prime Brokerage Prime Brokerage Business Unit Sold Information Asian Prime Broker Growth Independent Fund Prime Brokerage Book Administration Firms Prime Brokerage Service Hedge Fund Ethics | Code of Capital Introductions Ethics Prime Brokerage Technology Prime Broker Market Share & Prime Brokerage Clearance Clients Services Prime Brokerage For Small Capital Introduction Services Hedge Funds Prime Brokerage Services Hedge Fund Pitch Book | Prime Brokerage Consulting Marketing Prime Brokers Hedge Fund Service Provider Prime Brokerage Financing & Branding & PR Equity Services List of Hedge Funds | Prime Brokerage Clearance Directory of Contacts Services Lehman Brothers Bankruptcy San Francisco Hedge Fund and Hedge Fund Prime Event Brokerage Hedge Fund Transparency GLG Partners Exposure to Act Lehman Brothers Prime Brokerage Settlement Prime Brokerage Changes | Hedge Fund Risk Evolving Industry Management Lehman Bankruptcy Victims Where are Prime Brokers List Located Prime Brokerage Fees Capital Introduction Services Prime Brokerage Mergers & for Funds Acquisitions PrimeBrokerageGuide.org 115 . 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Events & Seminars Prime Brokerage Conference Hedge Fund Business Consulting Risk Management Advisory Services Prime Brokerage Trends Below please find all of the PrimeBrokerageGuide. facts.The Prime Brokerage Book 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.com articles on industry trends.com PrimebrokerageAssociation.org 117 . org | Networking  http://PrimeBrokerageGuide.org 118 .The Prime Brokerage Book Additional Websites & Resources  http://PrimeBrokerageAssociation.com | Private Equity PrimeBrokerageGuide.com PrimebrokerageAssociation.com | Career Guidance  http://PrivateEquityBlogger.com | Family Offices  http://HedgFundsCareer.com | Prime Brokerage Guide  http://PrimeBrokerageBook.com | Certification & Training  http://FamilyOfficesGroup.com | Prime Brokerage Book  Http://HedgeFundCertification.