Prime brokers provide hedge funds with research services, allow them to borrow stocks and bonds, and often assume rehypothecation rights. They can also pass on increases in their fees to their clients. The benefits of using a prime broker are many, and they are important to hedge funds and other investors.
Prime brokers provide hedge funds with the ability to borrow stocks and bonds
Prime brokers are financial intermediaries that provide hedge funds with the means to borrow stocks and bonds. These intermediaries have a detailed understanding of the operations and investment process of hedge funds. In many ways, they act as an over-collateralised creditor, assessing risks differently than an investor.
Traditionally, prime brokers provided hedge funds with cheap financing, but increased regulatory requirements, Dodd-Frank and Basel III, have made it more difficult for these intermediaries to lend to these funds. As a result, they are becoming more conservative in the securities they lend to hedge funds. In addition, they are raising their financing fees.
Prime brokers also act as a custodian and help hedge funds streamline financial reporting. Hedge funds may not have the time or resources to keep track of constantly changing regulations and rules. In addition, prime brokers may act as advisors on compliance and regulatory matters.
They offer research services
Prime brokers provide research services to hedge funds that they can’t provide on their own. Their research services are private and cut down on administrative costs. They also offer outsourced administration and trustee services, enhanced leverage, and lines of credit to hedge funds. Some prime brokers also offer concierge services to their clients.
These services are usually provided at no cost to the hedge fund. However, prime brokers do make money from their clients through spreads on financing, stock loans, and trading commissions. They also make money from synthetic finance products such as swaps and CFDs. Prime brokers also help hedge funds access research and other information to help them make better decisions.
Many prime brokers have long talked about building an open architecture system that would allow hedge funds to work with multiple prime brokers. Unfortunately, these services aren’t widely available. Fortunately, some top-tier prime brokers have extended their services to include hearsay reporting, which aggregates external prime broker positions and balances with the fund’s portfolio.
They assume rehypothecation rights
Rehypothecation is a type of lending that has been affected by the recent financial crisis. It provides liquidity to the financial markets, but it also has risks. It can lead to misallocation of assets, and rehypothecation can be costly. It is important to consider the benefits and risks before making such a decision.
This practice can be detrimental to hedge funds. Prime brokers have to be wary of losing client assets if they rehypothecate. They must retain legal title to the Fund’s assets, and this is an important point to remember in evaluating the risks associated with this practice.
In addition to the risks of losing client assets, prime brokers also face the risk of running a SEG deficit. This could happen if a trade fails. Moreover, if the prime broker does not have enough securities, it could go into bankruptcy. If that happens, the assets would be returned to the client’s account and treated as customer assets. However, prime brokers should remember that they cannot take over hedge funds with excessive margins. Excess margin is defined as anything above 140% of the hedge fund’s debit balance.
They pass on increases in fees to hedge fund clients
Prime brokers are passing on increased fees to hedge fund clients. As a result, they are reducing the number of clients they have and focusing on their most lucrative customers. This has left them with less manpower and physical resources to serve their clients. According to a recent Financial Times article, some prime brokers have begun passing on more fees to hedge funds to compensate for the reduced manpower and physical resources.
The practice of hedge fund managers working with prime brokers is not new. In fact, one major bank recently asked a hedge fund manager to leave the firm because his fund traded credit, which was less profitable for the broker than equities. As a result, hedge funds have responded by playing multiple prime brokers off each other. As a result, they are competing for a greater proportion of the fund financing business.
Prime brokers must change their business models to stay competitive and remain profitable. With infrastructure demands intensifying and cost pressures rising, fewer hedge funds will be able to stick with a single prime broker for all of their needs. Because of this, more managers are choosing to maintain multiple prime broker relationships, allowing them to receive competitive pricing and more non-traditional services.