Banks Bolstering Capital Introduction Teams
Investment banks looking to capitalize on the trillion-dollar hedge fund industry are plowing more resources into helping hedge fund managers raise money, according to new research. The move is an attempt to secure potentially lucrative start-up funds as clients. Executive search firm, A.E. Feldman, reports that prime brokers are strengthening their capital introduction teams. Professionals with an understanding of hedge fund strategies and expertise in developing relationships with institutional investors are in demand.
Hedge funds managing assets of $100 million or less ranked capital introduction as their number one priority in a survey conducted by financial research company Greenwich Associates.
Capital introduction refers to the introductions that prime brokerage houses make on behalf of their money managers to help raise their assets under management. These teams identify potential high-quality institutional and high net worth investors. They then introduce these asset owners to hedge funds whose strategy (such as fundamental long-short equities, distressed and high yield, merger and convertible arbitrage, fixed income arbitrage and global macro) and performance suits their risk and investment mandate. Expanding the distribution for most hedge funds is key to their success. Thus, one of the most critical considerations for hedge fund managers is the capital introduction ability of the prime broker.
Prime brokerage firms were developed in the early ’80s to help fund managers keep track of transactions and positions through a central account. Today, prime brokers have become indispensable partners in hedge funds’ strategy for success, offering a slew of technologies and services. It is the goal of prime brokerages to offer hedge funds investment strategies and help them maximize their trading performance, build their business, and attract new sources of capital. And according to the Associated Press, banks that can give hedge funds an edge through technology, access to sophisticated financial instruments, and capital introductions are increasingly rewarded with routine prime brokerage business.
Morgan Stanley, Goldman Sachs and Bear Stearns are the three largest prime brokers. Together, they control 58% of the hedge fund market, according to last year’s Lipper Hedge World survey. In contrast, Dow Jones Financial News says banks with younger capital introduction divisions such as Credit Suisse, Lehman Brothers, UBS, and Merrill Lynch are racing to not only boost their capital introduction teams but also expand their services to go head to head with rivals on a global scale.
New services among capital introduction teams include targeting newer investors in hedge funds, such as pension funds and endowments, according to Financial News. In addition, many are now expanding geographically, reaching out to the Asia-Pacific region and the Middle East. And although attracting large fund managers is critical to prime brokers, Financial News indicates that they are also focused on luring start-up funds and newer managers. Specifically, Morgan Stanley works with 80% of the top 100 hedge funds by assets under management, but it now sees the best opportunities for growth with start-up fund managers.
Prime brokers collect fees for financing and executing trades, lending stocks, and keeping trading records. According to Financial News however, some prime brokers have even suggested that it might not be long before they charge a separate fee for capital introductions.
