Increasingly, boutique prime brokers are gaining favour among both emerging and established hedge fund managers as they seek to develop higher-touch, more meaningful relationships. This is understandable against a backdrop of uncertainty in recent years, with bank-owned primes culling non-profitable hedge funds as they deal with the pressure of managing their balance sheets more effectively under Basel III.
At the end of the day, hedge funds want the stability of long-term PB relationships; something that GPP, a London-based boutique prime, has been more than willing to offer.
“The allure of the boutique prime broker is that we provide access to a full range of services that a lot of smaller managers often don’t get with the bigger prime brokers,” remarks Sean Capstick (pictured), Head of Prime Brokerage, GPP. “They are increasingly focused on larger, billion dollar hedge fund managers. Ultimately, what that means is that the smaller manager gets ignored with access to limited client service, slower response times and no flexibility.”
Boutique primes work for smaller minimum fees.
Big banks have more demanding minimum fees for the PB services they offer. Moreover, many of them still work in a siloed way, whereby those revenues paid to the prime don’t necessarily buy smaller managers access to some of the bank’s other divisions.
A boutique prime, on the other hand, is one-stop shopping.
“You can trade equities (physical and synthetic), fixed income, futures and options, etc, you get access to margin finance and stock lending, all from one place.
“In a bank PB, this means multiple phone calls and multiple coverage people. This is just not scalable for a smaller manager without a huge operations team. It’s a lot easier for them to work with a boutique prime as they have one legal agreement and the whole relationship is much easier for them to manage,” says Capstick.
Anywhere hedge funds can achieve greater operational efficiency, and potentially greater cost efficiency, they will sit up and take notice. The days of staying loyal to a star PB, and using its name for kudos in the marketplace, are largely over. Today, regardless of the name of the PB, what managers want, and expect, is a high quality client experience. They want to feel valued, and appreciate that they need to generate sufficient revenues in order for that happen.
This is helping the PB model become more transparent because the more PBs know a manager’s entire trading strategy, the better placed they will be to support them the right way.
“We use an omnibus account where we aggregate all of our clients’ portfolios into one trading account. That gives us more buying power with our end providers. Each one of our clients gets the buying power equivalent to 70 hedge fund clients, which translates as a GBP4 billion entity. Most people’s pricing when they come to us doesn’t go up, it goes down,” explains Capstick.
On the trading side, GPP has a dedicated trading desk that trades everything from credit to rates, global equities, F&O, FX. It is, says Capstick, a 24/5 trade execution function. US and European hours are traded from London before the book is then passed on to its team in Hong Kong.
GPP is also front-end agnostic.
“We work with most front-ends such as Bloomberg EMSX and IRESS. However people want to route into us, we can, by and large, support. We do DMA execution primarily but can also handle care orders, Bloomberg chat orders and so on,” says Capstick.
GPP provides a number of value-add services to its clients thanks to various partnerships it has established in recent years. Take research consumption, for example. GPP works with the London-based independent research platform, RSRCHXchange, which provides a marketplace for sell-side research.
“They work with small boutique research providers through to some of the bulge bracket names providing research to the buy-side. Managers pay them hard dollars to buy research, which is in full compliance with the newly introduced MiFID II regulations, where execution commissions now need to be unbundled from research.
“On the capital introduction side, we work with Edgefolio, which provides a marketplace similar to RSRCHXchange, helping to pair together potential hedge fund allocators with hedge fund managers.
“In a MiFID II world, when there are big questions as to what constitutes an inducement, our view is building out a capital introduction function internally is potentially conflicted. As such, we’d prefer to continue working with a platform like Edgefolio,” explains Capstick.
One might assume that value-added services such as these are a given, an expected part of any PB arrangement. But as stated earlier, it is the quality of the service that matters, not whether it is offered in the first place. Edgefolio uses an open architecture platform, which is available to all of GPP’s clients.
“Everyone has a fair crack of the whip and in our view, we think it is a good scalable solution,” asserts Capstick.
And that’s the point: all clients are treated equally at GPP.
In the largest bank-owned primes, they will typically have large incumbent cap intro teams dotted across the world’s leading cities. There is no actual revenue associated with them, however. Rather, the revenue comes from the bundled payment that is the prime brokerage revenue stream.
“How do you best allocate that cap intro resource? The answer is, to your largest hedge fund clients, who by definition are not the ones who need that service because they will often have their own internal sales and marketing teams.
“The very people who need it are the smaller and emerging managers, who aren’t paying the banks enough in revenue. There’s a clear conflict with this,” suggests Capstick.
There is no right or wrong way to offer PB services. Ultimately, it will come down to personal chemistry, whether portfolio managers have pre-existing relationships, and other soft factors, beyond merely cost considerations.
But it is fair to say that the level of interaction and support one gets from their prime is becoming an increasingly important consideration, especially among millennial managers.
It seems to be working to GPP’s advantage.
“We’ve gone from GBP1.5 billion of assets to GBP4 billion of assets over the last 18 months. Our revenues are at all-time highs and growing rapidly. We’ve added three hedge funds a month, on average, this year and we now have 70 hedge fund clients in total,” concludes Capstick.
