Pre-2008, Prime Brokerage was a land grabbing exercise. Balance sheet was put to work, free of the shackles of regulation, and hedge funds of all shapes and sizes were welcome. That model has now changed under Basel III. And whilst US banks were quick to recapitalise following the financial crash, European banks have taken longer to assess their balance sheets. Many are now taking steps to restructure as a result.
"In the post-2010 era, it has become a much clearer regulatory environment and a much tougher capital situation, particularly for European banks. I think US banks, with liquidity stress testing etc., have been a bit ahead of the curve and have got their balance sheets in better shape," says John Laub, (pictured) Co-Head of Global Prime Services at Jefferies LLC, one of the few pure-play global investment banks still in existence.
Laub is uniquely positioned to bring his perspective to the changing prime brokerage landscape. He joined Jefferies last year from Red Alder LLC, a US equity long/short hedge fund. Prior to this he was head of Prime Brokerage in the Americas at UBS AG.
That bank-owned prime brokers are going through a period of rightsizing is proving advantageous to Jefferies. Its business is all about serving institutional customers through equities, fixed income and banking. Crucially, Jefferies didn't overinflate its balance sheet in 2008. It has, says Laub, grown its business "slow and steady". This has helped avoid the need to react to regulatory rules and re-think its business model and become more of a partner to its hedge fund clients.
"Being an institutional investment bank, what we are selling to our clients is not really our balance sheet, it's the franchise overall," explains Laub. "We've got an excellent equities platform encompassing research, corporate access and trading expertise. What we like to say to clients is, `We've got a tremendous equities platform, we cover 2,000 stocks, so partner with us to get the resources you need to make money and grow your business.'"
Jefferies currently has approximately 400 managers on its equities platform. "We've invested resources both in our Capital Introduction team and our Business Consulting team to help expand that capability over the last 18 months," says Laub, adding: "We help our clients to make money not only on the research and trading side, but also in areas such as securities lending. We have tremendous color and content to help clients understand the short selling landscape, pricing trends etc., and ensure they are being as efficient as possible at executing their strategy."
"Overall, we can provide many resources to help managers in the early stages of running their hedge fund business and as they continue to grow and institutionalise," comments Laub.
Regardless of regulations, a USD5billion hedge fund will likely always get resources from any prime broker. The issue for a lot of emerging and mid-sized managers, however, is they're not getting the attention of tier one primes. It's only when they start to grow their AUM that these larger primes pay attention.
"What we are saying is, `We'll help you to grow your business from day one. We'll help you with your marketing strategy, your infrastructure and and everything else you need to be successful and we believe we will be very complimentary to those managers that already have a large bank as a prime broker."
"If you factor in our business consulting efforts and our capital introduction efforts, along with our securities lending expertise, overlain with the entire Jefferies franchise: that is what is helping us to win market share and grow our business," concludes Laub
