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Hedge funds fuel banks’ prime brokerage profits

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Hedge funds are helping drive prime brokerage revenues higher among investment banks such as Goldman Sachs, Morgan Stanley and Bank of America this year, according to a report by the Financial Times.

Goldman Sachs’ equities, fixed income, commodities and currencies market-financing prime brokerage business is on track to make $8 billion this year, with hedge fund clients By comparison, the division netted $2.6 billion in 2013.

Meanwhile, Bank of America saw a decline in Q2 equities market revenues, but this was “partially offset by an increase in client financing activities”, it said in its second-quarter presentation.

Hedge funds have become more important to equities and FICC intermediation businesses of banks as well as smaller but strategic areas like equity research, noted fintech company adviser Rupak Ghose, a former head of corporate strategy at ICAP/NEX and a former financials research analyst.

“While long-only active fund managers have historically been a larger aggregate proportion of clients for sellside banks and market-data vendors, they remain on the decline for well-reported reasons,” Ghose observed. “The shift of hedge funds from a wide number of equity/short funds towards a smallish number of multi-strategy and fixed income or macro funds will show up in three distinct ways: headcount; investment/infrastructure; and investment style/leverage.”

Ghose added: “Banks, brokers, exchanges, and market-data vendors should remember that, with interest rates at 5 per cent, the hurdle rate for absolute-return businesses like hedge funds is much higher. Some of those hedge-fund cash cows may get sent to pasture, and the financial industry should be prepared.”

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