Thu, 08/10/2009 - 12:32
Hedge funds’ assets under management will total USD1.5trn in 2010, according to a report by Tabb Group.
The report says the prime brokerage market is still significant and Tabb expects prime broker revenues to top USD10bn in 2010.
According to Tabb, the shocks of September 2008 set in motion a re-evaluation of existing relationships; the development of new prime relationships; the development of true multi-prime capabilities; new custodial arrangements with prime brokers; and non-prime broker affiliated custodian banks. Only a full year later is this industry beginning to settle down and the pace of change and instability finally slowing.
While starting to recover, the hedge fund industry remains at a crossroads. Nearly 80 per cent of hedge funds have the same or fewer assets under management, leverage is down, investors are queasy and legislators are angry. As a result, the prime brokerage industry is equally challenged. While AUM is still down from all-time highs, significant net inflows and performance-related asset increases are well on their way.
The crisis of confidence in the banking sector had a sharp impact on hedge fund attitudes toward prime brokerage, explains co-author and Tabb Group analyst Matt Simon: “When Lehman Brothers collapsed, funds scrambled for new relationships that would reduce the fear of waking up to a zombie provider. Even hedge funds less concerned about the imminent collapse of their prime brokers felt it was a good opportunity to reassess existing relationships.”
Before the collapse, he adds, over 30 per cent of the funds had a prime relationship with Lehman or Bear Stearns. As a result, over the past year, 45 per cent of the funds added at least one new prime broker agreement. JP Morgan, Credit Suisse, Deutsche Bank and Jefferies were most frequently cited as gaining relationships.
Although there are operational challenges involved, the reassessment of existing relationships is underway as 66 per cent of the single-primed hedge funds are considering multi-prime broker relationships, allowing for quick movement of assets between brokers by year’s end 2010. Tabb also sees the rise of mini primes, garnering an estimated ten per cent of new prime agreements, driven by the need for increased service levels.
Adam Sussman, Tabb Group’s head of research, adds that although a hedge fund’s initial implementation of a more diversified prime brokerage model is likely to negatively impact the primary provider, the greater impact on long-term market share will be determined by whether or not asset growth comes from existing funds, many of whom will keep the majority of assets with longstanding relationship, or new fund launches.
“If a new crop of hedge fund managers is going to be responsible for a renewal of industry assets, it could very well be the smaller prime brokers that gain in market share. Then, the challenge will be to hold onto those relationships as today’s Davids become tomorrow’s Goliaths,” he says.
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