This Hedgeweek report tracks the seismic market shift in the prime brokerage market which has forced large banks to shed their hedge fund clients and allowed nimble technology-focused players to win small to mid-sized hedge funds, while some European bank
The 'Prime Brokerage 2015' special report comprises eight separate articles listed below, these can be read individually or as a sequence.
US prime brokers are stealing a march on their European peers as European banks grapple with the demands of shoring up their balance sheets to comply with Basel III rules. As Reuters reported 7th October 2015, Goldman Sachs and Morgan Stanley have a 37 per cent market share, up 6 per cent from the end of 2014 (according to data from Preqin). Goldman was servicing 2,240 hedge funds through May 2015, followed by Morgan Stanley with 1,693. JP Morgan rounds out the top three with 1,462 hedge funds.
Earlier this year, Concept Capital Markets LLC was acquired by Cowen Group, Inc. ("Cowen"), a US investment bank and alternative investment manager with a heritage dating back to 1918. The transaction was completed 1st September and thanks to the significant financial resources that Cowen has at its disposal, the newly named 'Cowen Prime Services' division is now in a strong position to move quickly and build out its market share; with Europe a key focus of attention.
Pre-2008, Prime Brokerage was a land grabbing exercise. Balance sheet was put to work, free of the shackles of regulation, and hedge funds of all shapes and sizes were welcome. That model has now changed under Basel III. And whilst US banks were quick to recapitalise following the financial crash, European banks have taken longer to assess their balance sheets. Many are now taking steps to restructure as a result.
By Jerry Lees (pictured), Linear Investments – A quasi-revolution is happening in prime brokerage. Post-2008, bulge bracket banks were non-discriminatory in the type of hedge fund business they onboarded as managers and their end investors sought to minimise counterparty risks post-Lehman Brothers by opening up accounts with multiple prime brokers. Today, the landscape is vastly different.
As the industry watches the growth of liquid alternatives among institutional and individual investors, fund managers are also looking ahead. The retirement market may be the next frontier. It represents a large and growing pool of assets driven by the importance of retirement savings across multiple investment segments.
There's no question that regulation is causing prime brokers to reassess, and, where necessary, evolve their business model. Much is made of the fact that prime brokers are ruthlessly culling hedge funds, banishing them to hinterland. Hedge funds that aren't generating revenues for their primes have become the vampires of high finance, sucking the lifeblood out of banks' balance sheets.
Regulation, in the form of AIFMD and Basel III, has had a profound effect on the way that prime brokers and fund managers view their relationship. Ten years ago, things were simple. Hedge funds and prime brokers alike operated with fewer regulatory constraints, leverage financing was more freely offered to funds of all shapes and sizes. But the environment has become a lot more complex. Banks' balance sheets come under increased pressure and managers face direct regulation under AIFMD, requiring those running EU-based AIFs to appoint a depositary.
Automation lies at the heart of Interactive Brokers' prime brokerage model. Be it for risk management, account management, trade execution and pricing, everything is streamlined so as to provide fund managers with a cost-efficient solution.