Industry supportive of prime business despite hurdles
Buoyancy in the hedge fund industry, following a year of strong performance, bodes well for the prime brokerage business. Numerous new funds are being launched and prudent prime players are benefiting from the renewed interest in the asset class.
“Hedge funds had been losing their lustre in the years leading up to the pandemic. At the height of the 2020 volatility however, they proved their worth by protecting against the downside while giving the opportunity to investors to participate in the upside,” Jack Seibald (pictured), Managing Director and Global Co-Head, Prime Brokerage & Outsourced Trading at Cowen observes.
This positive performance revived institutional investors’ appetite for hedge funds, in turn leading to an increase in fund launches. These developments have been encouraging for the prime brokerage industry.
From Cowen’s perspective, the last year represented a significant evolution. “2020 felt like a watershed for the firm’s international prime brokerage business. It really took off last year and set us on a completely different level, both in terms of revenue as well as profitability. This gave us the courage to be more aggressive in terms of our marketing efforts and we’re seeing the result of that strategy flowing through this year.”
The international growth Cowen experienced was partly due to having inherited the Global Prime Partners business. In February 2020, the firm agreed to integrate the GPP business into its own. Although the book of business itself was a significant boost to Cowen, the personnel obtained through the transaction was even more impactful.
Cowen hired GPP’s prime brokerage team, including personnel from the sales, operations, client service, onboarding and trading teams. “We then made some strategic hires along the way and the resulting team has turned out to be very productive,” Seibald comments.
He also reports the firm’s prime brokerage clients are getting larger as managers make the move from bulge bracket firms. In Seibald’s view, the reason for firms moving is down to client management: “Many clients feel they are not being paid sufficient attention by their existing primes This is a story we’ve heard many times. With a bulge bracket firm, unless you’re generating a large amount of revenue, you tend not to get a lot of attention and often have to ask twice or three times for something before getting it.”
From a capabilities perspective, Cowen is a credible alternative to the bulge bracket firms.
Extending trading desks
In addition to the reawakened demand for hedge funds, the pandemic also nudged forward the case for outsourced trading. This space is on an upward trajectory across the industry. Seibald explains: “Larger managers who found themselves operating from home realised they needed a bridge between the portfolio managers and their traders. In fact, we got many calls at the start of the pandemic asking us to act as an extension of the managers’ trading desk.
“After a while, they realised the set up worked well and the historical belief that managers and traders had to be in close proximity no longer held. Therefore, larger sized managers started considering outsourced trading, either as an add-on or permanent solution. We’ve seen the uptake of this service broaden out to a much larger audience and consisting of much larger players.”
This line of business has allowed Cowen to develop a new client base which historically it would not have had access to.
In Seibald’s view: “Unless you’re a very large player, the cost of building, managing and maintaining your own trading desk is prohibitive. We have traders all over the globe, specialised in the various asset classes. So regardless of what book you’re trading and how broad it is in terms of asset classes, it is unlikely a firm will be able to build a trading team of the calibre they would have at their disposal through Cowen.”
The relationships the firm built on the outsourced trading side has also contributed to growth in Cowen’s prime brokerage business. “As some clients get beyond a certain size, they start contemplating adding an additional prime broker to diversify their counterparty risk. In light of this we’ve had the opportunity to pitch and win some of this business on the prime brokerage side. In large part, these wins were driven by all the other services we were already providing these clients. Our offer to those clients can be far more competitive because they’re already generating a bunch of revenues with us.”
Seibald doesn’t foresee the outsourced trading and prime brokerage businesses converging to a meaningful extent, but the firm is always looking to anticipate clients’ needs and build the capabilities to satisfy those requirements.
Industry under the lens
Recent news of high-profile events like the Archegos collapse and the GameStop run caused some retrenching in the prime brokerage world. Seibald addresses these two influential incidents: “GameStop forced prime brokers to be far more vigilant with their clients’ exposure to names they were trading. We changed our margin and risk rules almost on a daily basis to protect the clients and the firm, fully understanding that if clients blow themselves up, our capital is next in line.
“Archegos raised some bigger questions related to counterparty risk. There were prime brokers relying on their clients to be truthful and disclose their full exposure to certain securities. This was proven to be a sub-par risk management tool and some firms got hit quite hard. As it relates to the bulge bracket prime brokers, I think there will be a reassessment of the relationships they have with clients to which they’re extending enormous amounts of credit. The prime brokers are going to want greater transparency, as to the client exposure to the underlying securities the bank is financing at that moment in time.”
He underscores that this doesn’t apply to the Cowen business as its prime brokerage business was not built to, and is not dependent on, providing hedge funds with inordinately large amounts of leverage at excessively cheap rates.
Jack Seibald, Managing Director and Global Co-Head, Prime Brokerage & Outsourced Trading, Cowen
Jack Seibald is Managing Director and Global Co-Head of Prime Brokerage & Outsourced Trading. Jack co-founded Concept Capital Markets, LLC, and until its acquisition by Cowen, served as a Managing Member of the firm. During his tenure with Concept Capital, Jack was involved in the management of all aspects of the firm’s operations, with a particular emphasis on business and client development and legal matters. Jack also served as a member of the Board of Managers of Concept Capital Holdings, LLC, the company’s former parent, Concept Capital Administration, LLC, which provided administrative services to the company and its affiliates, and ConceptONE, LLC, which provided risk and performance analytic solutions, middle and back office support services, and regulatory reporting services to investment managers. Jack has been affiliated with the firm and its predecessors since 1995 and has extensive experience in prime brokerage, investment management, and investment research dating back to 1983.