Deutsche Bank launches prime brokerage solution for German hedge funds

Antonello Russo of Deutsche Bank’s Global Equity Prime Services’ Sales and Marketing team, who has been working on the German market for the past year, said that the first German-domiciled single strategy hedge fund created under the new regulations by DWS Investments is expected to be approved by the authorities within a few weeks.

Deutsche Bank will be the prime broker to the new fund and State Street will be the custodian. Deutsche Bank sold its global custody network some time ago to State Street and maintains strong links with it.

Last year the announcement was made that Germany was going to open up to hedge funds investment, providing the framework for financial professionals to set up hedge funds domiciled in Germany and also to allow investors to invest in hedge funds.

Russo said: “We’ve been working since March 2003 on understanding the equity financing needs of the upcoming German hedge funds. This week we launched a breakthrough model which will work for the German hedge funds in line with the new regulations.”

He noted: “Our focus has been equity financing services and how these could be implemented with the German framework.  A key discussion point was the requirement that Germany-domiciled hedge funds use a custody bank also domiciled in Germany.”

“The solution we offer in this framework combines the presence of both a prime broker and a depository bank: the depository bank is responsible for all the assets it keeps in safe custody,  but it can appoint a sub-custodian. The prime broker will become the sub-custodian and the depository bank will outsource some of its functions so that the assets of the hedge fund can be handled by the prime broker.”

“Think of the custody bank as offering a host of services. Some are  fiduciary ones, which cannot be outsourced. Others concern the custody functions. Some operational functions of this latter area can be outsourced by the depository bank, which in any case retains its responsibilities towards the investors.”

“When it comes to implementing this solution, a possible model is that the investment manager appoints the custody bank and the prime broker at the same time. The custody bank approves the prime broker and appoints it as sub-custodian. This is the model we have used for the first German domiciled single strategy hedge fund that is currently awaiting approval by the authorities.”

German institutions are expected to launch the majority of new single strategy German domiciled-hedge funds, given their greater resources and ability to be first movers in the market.

Although the launch of single strategy funds in Germany is expected to grow in a steady fashion, industry experts are predicting that the market could become the second largest in Europe next to London, displacing France’ current number two position.