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“In 2011, we identified that larger prime brokers were pulling back on smaller hedge funds. We saw our opportunity at that point,” states Paul Kelly (pictured), CEO of London-based Linear Investments Limited; an FCA-approved full service mini prime broker (Linear Mini Prime) providing full prime brokerage, custody and execution services to small and mid-sized hedge funds. 

Back then, Linear Investments carved a niche supporting managers with USD5m or less in AuM. Aside from prime brokerage services, Linear also set up an FCA-approved regulatory umbrella for managers in a bid to keep operating costs to a minimum. 
 
“It was a good fit for us to support smaller managers,” says Kelly. “We were able to offer them desk space and provide a full one-stop service.”

Eighteen months ago, however, things started to change at Linear Investments. With Basel III regulation leading tier one primes to concentrate on the top 10 to 20 per cent of their clients, managers with substantially higher assets (USD10-50m) started knocking on Linear’s door. 
 
“What we heard was that unless clients were making EUR250-500m in revenue they were being told to find an alternative broker. We are an aggregator. We can pull in a lot of these smaller managers and then feed that aggregated AuM as a larger client to our prime broker. We have the ability to hold client money, execute trades etc, but we back that in to our own prime broker; it’s a pure omnibus account structure that we use,” explains Kelly. 
 
Stephen McCreath is Head of Prime Services at Linear. By working with additional providers behind the scenes, Linear is able to hold managers’ fund assets in multiple locations, allowing them to benefit from a proxy ‘multi-prime’ arrangement through a single counterparty.

“A hedge fund using three primes today is going to need EUR300m to EUR400m in AuM to meet the revenue targets of each broker, whereas we can give managers a similar arrangement in a much more cost-efficient way,” says McCreath. 
 
Although banks have been scaling back their equity trading desks to adjust to regulation, at the same time operational staff numbers have increased; the net effect being that there’s an ever-increasing cost base to distribute to a shrinking number of revenue-generating desks. 
 
“A lot of clients that we have may have been paying for execution services in a previous arrangement but not paying for prime services. As a result, they are being offloaded by primes because the revenues are falling short, whereas we can take a more holistic approach,” says McCreath.

“We may not get a lot of leverage out of the strategy but a manager might be trading a lot on a daily basis so collectively, they are viewed more favourably by us,” adds Kelly. 
 
This silo-based arrangement has become a problem for banks where execution desks have a separate P&L to the prime services desk. As a result, primes are becoming much more focused on the amount of balance sheet they are willing to use to support a client. 
 
“We are finding that banks are focusing on their top 100 clients. It’s more cost-effective to increase the wallet share of a USD10bn hedge fund from 5 per cent to 7 per cent than add 10 new clients,” concludes Kelly. 
 

Over the last two years, Linear has grown its business to include Capital Introductions, a comprehensive range of asset classes, a Wealth Management team as well as Custody and Stock Loan solutions. 

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