PARTNER CONTENT
By Jorge Hendrickson & Mark McGoldrick
Managing Directors, Co-heads of Prime Brokerage, JonesTrading
Your partners matter more than ever. In this paper we summarise key factors to consider when selecting a prime broker. You have read various papers on this topic before, but this is meant to give a practical, currently relevant, and time-tested guide to making good decisions based on the most critical details. Getting this right will greatly increase the odds of success.
Client service
Is your PB providing you with a genuinely consistent and top-quality level of daily support?
Fund managers are doing more with less internally for many reasons. Support from the fund’s PB matters more now than ever. With a top service model built with quality teams, strong and flexible technology, efficient communication, robust reporting and reliable portals, emerging managers can allocate more of their time and budget towards generating alpha and marketing.
Revenue minimums
What is a PB relationship worth? Should a client commit to minimum revenues that are beyond the natural revenues that their portfolio generates from trading, financing, and other activities?
The shift in the prime brokerage space is a residual effect of some formerly major players leaving the field. Thus, forcing larger primes to evaluate their client base strictly through the lens of revenue and operational utilisation in an attempt fill that void and capture market share. The result of that evaluation, oftentimes, is an increase in revenue targets, material change in service and in some cases fund managers being asked to leave the platform altogether. The PB’s reasoning certainly makes sense from their perspective, and within the context of its overall business model and marketplace. However, this dynamic has brought difficult choices for fund managers.
Abrupt material changes in deal-terms can have a measurable impact on fund performance and the service relationship. These fee changes also overlook the underlying investors who ultimately bear the brunt of this increased cost through performance drag. Partnering with a PB that is transparent on fees, revenue expectations and is willing to take a long-term view of your business is vital to a fund manager’s success.
Scalable technology that reduces operational risk
Is the PB’s capacities enabling or limiting the fund manager’s maximum operational potential? An efficient, modern, and scalable operational architecture is at the core of a successful investment management business.
With the myriad of industry technology solutions available today (eg, EMS, OMS, PMS, data, risk tools, portfolio reporting), it is imperative that a prime broker take a reasonable “open architecture” view to their service offering, while managing operational risk. Fund managers are often forced to make drastic changes to their workflow and technology set-up just to cater to the PB’s limited offering and narrow integration capabilities. Choosing a PB who demonstrates a willingness to be collaborative with the fund’s ideal set-up allows investment managers to perform at maximum efficiency and at reduced risk for all parties involved including trading counterparties, custodians, fund administrators and other critical parties.
This is particularly important when a firm introduces separately managed accounts, SPVs, and co-investments. The right PB will enable growth.
Counterparty risk
Where are your assets sitting? This is at the core of prime brokerage and arguably the most important detail. Fund managers have a few choices that present a range of considerations, risk, and impact to their portfolio. The industry is often reminded that counterparty matters.
Several large balance sheet bank players left the field in the past few years. On the other hand, several boutique self-clearing firms have entered the fund market, have grown out of retail or professional trading brokerages, or have moved into servicing new asset classes.
A high-quality, top tier, custodian matters. Funds should not have to sacrifice quality in this category. It is critical that they take a thoughtful approach to finding the right prime brokerage infrastructure that fits their strategy. This may also include a multi-custody solution, if necessary, ideally with a PB who can ensure operational efficiency.
Customised electronic trading
What if a PB could provide customised electronic trading capabilities rather than a “one size fits all” algo suite?
Choosing an electronic trading partner who can customises algo specs for a client’s portfolio and trading style is vital and unique. Most algo suites are built for the masses and have become commoditised. These “off the shelf” algos attempt to perform across market caps and are often created to preference certain destinations and liquidity sources chosen by the sponsor. Understanding the ecosystem of electronic trading and liquidity is nuanced and deserves a thoughtful approach.
Proper electronic trading should continually evolve using deep reinforcement machine learning where the performance of past orders gets refined and adjusted to account for volatility regimes, liquidity, volumes, market participants and other factors. This process creates constant innovation through collaboration between the fund and the PB, with the goal of maximising performance and preserving alpha.
A clear distinction between high touch vs outsourced trading
How many hours are there in a day? In addition to the long list of required tasks when running a fund, managers are often forced to become trade execution experts. Many managers have not had to handle trading in the past, and this learning curve can ultimately turn into a strain on time and resources.
Many prime brokerage desks offer a high touch trading unit within their firm to handle this client order flow. This is a valuable service, focused on execution. At a minimum, these trades should be handled on an agency basis where there is no proprietary trading getting access to your order flow. However, beyond just agency trading, a proper high touch engagement should include access to a PBs Outsourced Trading desk where managers now have access to a diverse network of liquidity – dark pools, algorithms, block trades and access to street-wide liquidity.
The term “outsourced trading” often gets used to describe the former (basic execution with limited access to liquidity) rather than the latter (a true outsourced service and setup).
Capital introduction
How should a new fund manager rate their experience and collaboration with a capital introduction team?
Cap Intro is a process that if done properly, will lead to relevant and successful investor meetings. As someone once said, “it’s a journey, not a destination.”
Fund managers are best served by aligning themselves with a Cap Intro team that will take the time to understand them, not just sell them on their capabilities. The team should understand where the manager is in their lifecycle, provide valuable feedback, monitor progress, and serve as a resource to the client.
Ultimately the right team, with a process that lines up with the fund’s goals and strategy will have the highest odds of success. In addition, the cap intro team should be demonstrating innovative ways to help clients and increase their exposure to the investor community. This takes some creativity, but if done properly, investors will also view the team as a value add to their efforts, which is powerful.
Jorge Hendrickson, a managing director and co-head of prime services, JonesTrading – Previously, Jorge was chief revenue officer at Opus Fund Services. Prior to that, he worked in prime brokerage sales and capital introductions at Concept Capital Markets (now Cowen Prime Services). He also worked at Bay Head Capital with a focus on new launches. He held a variety of operational, trading and investor relations roles at Intrepid Capital Management and Bridgewater Associates. . He is experienced in advising fund managers on launching, operating, and scaling their investment management businesses. In 2021, Business Insider named him one of the “29 people to know when launching a fund.” He has worked with numerous funds over the years across Hedge, Private Equity, Venture Capital, Real Estate and Private Debt.
Mark McGoldrick, managing director, co-head of prime brokerage, JonesTrading – Utilising his knowledge and experience, Mark acts as consultant to new and emerging hedge funds by guiding them through the arduous process of launching and growing an investment management business. Mark has extensive trading and prime brokerage experience dealing in all facets of the alternative space from fund formation, managed accounts, execution and risk management to marketing and capital introductions. Prior to Jones Trading, Mark was a director of prime brokerage and outsourced trading at Cowen. Before Cowen he was a founding member and head of marketing and business development of boutique prime broker Alaris Trading Partners, LLC. After five years in operation, Alaris was acquired by Concept Capital Markets, LLC in August of 2011 where he helped lead the transition to Concept’s platform. Concept was then acquired by Cowen Prime Services, LLC in September of 2015. Prior to founding Alaris he was employed by UBS Securities, LLC as associate director in the prime brokerage division working with hedge funds in a sales, relationship, and capital introductions capacity. Mark started his career in finance with State Street in the portfolio accounting division covering the Paine Webber funds.
