Banks Expanding Lucrative Prime Brokerage Units
Despite ongoing market turmoil, the hedge fund industry is still going strong. In fact, new research shows that Investments in traditional asset classes by U.S. institutions shrank by $256 billion in 2007 as investors moved billions into hedge funds and other alternative investments. Moreover, investors are expected to pour more than $200 billion into hedge funds this year, reports Reuters, citing Deutsche Bank. This comes as hedge funds posted positive returns last month, reversing some of the March declines, according to FINalternatives.
This is all good news for the prime brokerage industry. A new report issued by Tabb Group says brokers will pull in more than $11 billion revenues from hedge funds in 2008 - a 15% jump from 2006. The report also predicts that prime brokerage units will become banks’ most lucrative institutional business line in just two years. Executive search firm, A.E. Feldman, says the growing demands placed on prime brokers may create more opportunities for salespeople, marketing professionals and portfolio risk managers.
Prime Brokers Gain Importance
TABB Group believes that as the hedge fund industry continues to grow, and other asset management businesses attempt to compete more directly with hedge funds, the importance of prime brokerage will increase.
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. Brokers collect fees for financing and executing trades, lending stocks, and keeping trading records. And banks that can provide hedge funds with an edge through technology, access to sophisticated financial instruments, and other services are increasingly rewarded with routine prime brokerage business.
TABB analysts found that 86 large hedge funds, 336 medium hedge funds and 2,795 small hedge funds in the United States rely on prime brokers to clear trades, help finance their businesses, and even find them investors. Moreover, most large hedge funds use multiple prime brokers to assists in trading, lending, and to provide access to high-net worth individuals. Goldman Sachs and Morgan Stanley are among the leading prime brokers working to expand their dominance.
Hedge Funds in Expansion Mode
“The true industry players have seen significant growth over the last year, with the average fund approaching $4.5 billion AUM, rising from $1.85 billion in 2006,” says Adam Sussman, TABB Group’s Director of Research. Looking ahead, hedge funds are planning a continued expansion of their businesses, including opening up offices around the globe: as many as 800 depending on market conditions, launching new funds and trading new markets, according to TABB.
As investors funnel billions into hedge funds, competition for their business will grow even fiercer, the group says. What will be the key to success? Tabb reports that hedge funds say small things will make a big difference in winning prime brokerages new business, such as timely responses to calls, conference invitations and smooth trading reconciliation.
