Driven by the need to diversify in order to mitigate their counterparty risk and increase transparency, an ever-growing number of hedge funds of all sizes are leveraging multi-prime relationships to adapt and seek new ways to grow their businesses.
This is one of the findings of a study by Pershing, a BNY Mellon company, and the Aite Group, which examines the key role of prime brokers and the market trend of hedge fund managers implementing the multi-prime business model.
The study indicates that, as a result of major prime brokerage failures, counterparty risk has emerged as one of the major driving factors behind the growing trend among hedge funds towards the multi-prime model.
The report suggests that hedge funds that adopt the multi-prime relationship model can mitigate counterparty risk and enhance opportunities for sustained growth.
Among other benefits, multi-prime relationships can help ensure the safety and soundness of a firm’s assets, while widening its market reach and providing access to new asset classes and a broader array of sophisticated trading tools, the report says.
To effectively operate within a multi-prime environment, which adds such technology stressors as potential data loss, reconciliation failures and inaccurate reporting, hedge funds must develop an internal platform or use a service provider to streamline technology communications.
Craig Messinger (pictured), managing director of Pershing Prime Services, says: "Migration to a multi-prime model involves coordinating across multiple service providers, including prime brokers, hedge fund administrators, consulting firms and IT providers. However, once a stable multi-prime relationship model has been implemented, hedge funds can reap enormous benefits, such as diversification to mitigate their counterparty risk, increased operational efficiencies and access to competitive financing, stock loans, business consulting and OTC support."
Sang Lee, managing director of Aite Group, adds: "Hedge funds should take a long-term approach, relying on their initial prime broker partner to start the process of interacting with other prime brokers, while looking for ways to create a more sustainable multi-prime management framework. With the right multi-prime structure in place, hedge funds can better manage counterparty risk and focus on generating higher investment returns."
