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Creative opportunities to support mini primes

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Mini primes and those looking to establish new prime brokerage businesses are currently a big focus for SS&C Advent, according to Roger Woolman, Business Development Director, Asset Management & Alternatives.

Over the years the firm has built long-running relationships with some of the world’s largest prime brokerages and are, without doubt, highly valued clients. But as Woolman says: “The more interesting area for us, from a new business development perspective, is firms who are looking to break into the PB arena, such as mini primes. 

“We have a number of mini prime clients in the UK already and we are having ongoing discussions with a number of firms who are looking to move into the PB space here in the UK.”

The Geneva platform is well known in the industry and can actually trace its origins to the prime brokerage space thanks to a joint venture with Goldman Sachs, years before it incorporated the comprehensive fund accounting capabilities for which it is famous for today. The majority of Tier 1 primes use the platform where it operates within often quite complex IT environments that are required to support global bank activities.

By contrast, mini primes and spin-off operations are in a position where they can look at the current state of technology, as well as options such as hosting and managed services that the bulge bracket primes don’t necessarily need or offer to their clients. 

“It is not just about the software but the deployment of that software. We have the Syncova product, as well as Geneva, which also plays a key part in the PB/hedge fund relationship,” says Woolman.

Introducing primes like Cowen Prime Services understand the benefits of technology agility. As well as trading services, they provide additional operational support, including account opening with brokers, deployment of trading systems, trade-break resolution, as well as a complete set of shadow books and records using portfolio accounting and reporting technologies. What this means is that small and emerging managers receive Geneva reports that would ordinarily be beyond their reach. “We receive very robust reporting through Geneva using the web portal, which allows my COO to do analysis on the profitability of trades,” says one hedge fund manager.

Woolman says that the benefit to fund managers is high quality, robust reporting, which they can demonstrate to their end investors, while the benefit to prime brokers is the ability to attract new clients because of that reporting prowess. Not to mention the benefit it brings to SS&C Advent.

“The fact that emerging managers who partner with mini primes are indirectly getting familiar with our system could mean that in the future they consider using Geneva themselves, when they reach a certain size of AUM. 

“An emerging manager can now access Geneva a lot easier today than they could five years ago. We have much more agile and affordable ways of deploying the software. 

“Through their PBs, they achieve familiarity with the product before necessarily buying it, and it helps us reinforce our position in the marketplace. It is an easier transition for managers to make if they decide to deploy Geneva some time in the future,” explains Woolman. 

He adds that over the last couple of years, a lot of new enquiries have come from mini primes or people looking to set up mini prime operations: “In terms of mini primes, there are probably only a dozen or so that are here in the UK. We have onboarded a couple of those as new clients over the last two or three years.”

SS&C Advent Syncova helps strengthen transparency in the prime brokerage relationship by allowing hedge funds to accurately monitor and manage its margin obligations and stock lending costs. Specifically, Syncova Margin gives hedge fund managers clear insight into how profitable their trading strategies are with regards to margin and financing costs across multiple counterparties. 

“From a prime broker’s perspective, it’s all about profitability and that’s primarily why they use Syncova,” says Woolman. “Any types of margin calculations or finance calculations are particularly onerous and risky without using that sort of system and actually we have seen instances where profitability has increased significantly following its implementation. Like Geneva, there are also different ways to deploy Syncova available to PBs and fund managers. On the manager side, like Geneva there is some reassurance in terms of what they are being called for, from a margining perspective, and what exactly they are being charged.” 

Technology advances have undoubtedly helped primes, big and small, in respect to assessing the economic value of hedge fund managers. When regulation such as the Dodd-Frank Act was introduced following the ’08 financial crisis, the initial reaction by US banks with PB divisions was to cull unprofitable clients that they could not justify supporting with their balance sheets. Over recent years, that culling process has eased off as US banks have settled in to life under the DFA. Indeed, this June, the Federal Reserve confirmed that all 35 bank holding companies subject to annual stress tests had passed. 

Profitability calculations will depend on the suite of services being offered by the individual prime broker, when assessing hedge funds against available balance sheet. 

“The Geneva system provides a foundation, a true source of data, from which prime brokers can spin off a variety of calculations,” says Woolman. “Some are only offering trade execution services and they need robust, core systems to support various asset classes. Geneva not only provides a true record of positions, it also records spreads on those positions. It’s about ensuring that the prime broker is charging clients and making a profit over and above what they are being charged on those positions, when interacting with other prime brokers. 

“Data integrity and accuracy is key from a position perspective but also important is understanding the margin on each position; and that’s when Advent Syncova becomes an important tool.”

SS&C Advent remains as focused as ever on ensuring that its systems deliver the best capabilities to all its clients, not just prime brokers. Each year, approximately 20 per cent of its revenues go into R&D, with Woolman confirming that they are currently working on something called “Next Generation Geneva”. 

“We are making improvements in the background with respect to how the system performs calculations, as well as improving user interface flexibility. We are bringing it up to speed with the mobile age. From a future proofing perspective with respect to data capabilities, the beauty of Geneva is that it was always there and I think that’s been borne out by the types of clients who use it. It is a fully extensible database without requiring programming changes. The way we improve it is the way people interact with the system in terms of surfacing and interacting with that data, etc,” says Woolman.

Looking ahead, Woolman is excited by the opportunity of supporting start-up primes and mini primes “because it gives us the possibility of being a bit more creative in terms of deployment and outsourcing”. 

There is, he says, much more of a partnership consideration with these smaller firms, not only in terms of getting the business up and running, but also in terms of knowledge sharing to support their operations. 

“These firms tend to be more specialist than generalist, where they look to focus on specific hedge fund strategies. That might mean there are certain nuances in terms of how they process things and charge their clients. 

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