Turbine financing is taking off and leading Deutsche Bank to new heights as Nick Roe outlines recent changes and highlights key trends.
HW: You've made a number of new senior level appointments at Deutsche Bank recently - who are they and what is the background to these appointments?
NR: As you know, I'm now Global Head of Prime Services, the division that incorporates traditional prime brokerage, securities lending and structured finance at Deutsche Bank, for hedge funds in particular.
The new operating committee for this division consists of Penry Jackson, Head of Flow Synthetics (swaps) business, Richard Kennedy, Head of Structured Products (one-off trades), Fred Bird, Head of Risk, Mark Haas, Global Head of Prime Brokerage, Thomas Kerns, Head of Product Development (Prime Services), Frank Nelson, Global Head of Sales (Prime Services), John Dyment, Head of Capital Introduction, Sean Crowley, Global COO. For securities lending we appointed Jane Hammond as Head of Sales to give that role extra depth, and we retained the three regional heads Lane Hocking, Ben Sofoluwe and Paul Busby as co-heads of the trading businesses.
In making these changes we replaced a number of key people but the strength of our team at Deutsche Bank is such that we were able to take people from the next level and have them stand up and take control of the products - we did not bring in anyone from outside the firm to fill these leadership positions.
We made these changes to take us to new heights. It's healthy to have a new set of eyes focusing on the development of the business. The platform had been originally designed to deal with around 10,000 trades a day. However, because our business expanded so rapidly, at our peak last year we processed over a million trades in one day and in a typical day we currently manage around 450,000 trades.
We are now fully scaleable and we are out there hiring for a number of other positions within the various teams.
HW: What are the targets for the new operating committee?
NR: Having worked on the control issues, the targets for the committee are really to develop their own internal products and streamline them in terms of efficiencies across the board.
For example, we're adding new technologies to make certain processes more automated. The issue we had in the past was that we spent a great deal of money on technology but none of it was passed through in terms of benefits to the end user - the client - so we have set up a product development role under Thomas Kerns to deliver what the client wants.
HW: What key trends are you currently seeing?
NR: Our business is now diversified to the point of having 45% fundamental long/short funds. One trend we are seeing from the fundamental long/short market is that they require far more research and far more colour on the short side before they take up a short position.
They previously believed in using their own technical and fundamental analysis whereas now they are really drawing on the experience of our securities lending professionals to understand the flow before they put the short on.
The reason for this change is that people previously didn't really understand how the securities lending market worked, they treated it as if it were a long position on the short side and really didn't know that there is a completely different dynamic.
People are becoming more aware of the market and have become more educated about how they put their short positions on these days.
HW: Are you also seeing more diversity in asset classes?
NR: Absolutely. We're moving away from the more traditional equity finance play these days because opportunities exist across the whole of the market rather than just within the equities markets.
Hedge funds looking to create alpha are realising it is harder to find alpha in the established equities markets and we're now getting involved in turbine financing, airplane financing, land financing, bank debt, private equity funding.
You're seeing elements of private equity and the cutting out of the capital markets process with the Manchester United takeover, where Malcolm Glazer engaged directly with four or five hedge funds to fund his takeover of the football club.
HW: Are we now seeing the emergence of hedge funds as key financiers across major deals?
NR: Yes. If you chart the evolution of hedge funds, given the increasing regulation around them, it mirrors the evolution of investment banks, and the two may indeed converge at some point.
HW: What are you seeing in the emerging markets?
NR: Asia is becoming very important and already accounts for 12 per cent of our revenues. We are particularly keen on South East Asia where we see real opportunities to expand our services.
We're also opening up Hong Kong local and Korean-based direct market access to equities which a number of quant funds are excited about.
The growth in investing in the region is not just from hedge funds but increasingly from local institutional investors investing domestically and across the region.
We are looking to open up accounts and offices across the whole of South East Asia.
Latin America is also coming to the fore. There are already around 100 funds based in Brazil alone, and given that there is nothing exciting happening right now in the G10 area, we are going to see expansion in these markets.
HW: What products/services are your clients demanding?
NR: Connectivity is a key focus for us. We're finding that hedge funds want and demand far more connectivity across a variety of products and nobody has quite got that together yet - we're close and certainly with our largest clients we already have connectivity set up for them across a variety of markets and we are already very exposed to the issues of direct market access. We are keen to provide these services for very large hedge funds who don't necessarily need to have a person at the other end of a 'phone.
HW: What about risk management?
NR: There is a high demand for risk management in the current environment. We've already got DB Risk Office, which we developed with one of the largest hedge funds in the world, and we continue to develop this risk platform as a strong value proposition for our clients, to the extent that every single client we now take on wants DB Risk Office.
HW: Is transparency an ongoing issue?
NR: It is a big issue for us. Hedge funds are demanding more transparency across the entire firm and also want us to provide a multitude of bespoke reporting for them. They are driven by the threat of increasing regulation and institutional investors' due diligence requirements and want to have a very flexible reporting tool on their front end, so they are putting the onus on their prime brokers to come up with the goods.
HW: The UK's FSA has spent a long time looking at the industry and talking to key players such as yourselves, what do you think their report will focus on?
NR: I think they will focus on transparency issues around derivatives. They want to maintain confidence among retail investors in efficient markets, so we will see far more transparency in reporting, in terms not only of synthetic positions but also in terms of general trading trends. OTC markets will come under close scrutiny, as will all soft dollar issues.
HW: We see more hedge funds going public, what are your views on this issue?
NR: The issues are really for the hedge funds themselves. Going public raises risks in its own right, as once a hedge fund goes public, its shares can potentially be traded and shorted by other hedge funds.
HW: Is there any substance to recent reports that there has been a reduction in the number of prime brokerage counterparties used by hedge funds?
NR: Yes, for the first time we have seen a reduction in the number used by the larger hedge funds. The reason is that in these markets larger hedge funds need the investment banks on their side and are consolidating their business to gain something in return from the investment banks in terms of access to more ideas that generate alpha.
HW: What are the implications for prime brokers?
NR: In this environment, the winners on the prime brokerage front will be ones that are able to cut across the entire capital markets platform within their banks and present a united front to their larger hedge fund clients.
There are very few prime brokerages that can achieve that and they are the ones that are making money in this space.
HW: How many hedge funds does Deutsche Bank service and are you making money in this space?
NR: We service around 470 fund managers and in excess of 6,000 hedge funds/funds of hedge funds. We are certainly one of the most profitable platforms vs our peers.