Whether you are an emerging hedge fund manager aiming to strengthen your infrastructure or a more established fund evaluating your counterparty risk profile, having a diversified mix of prime brokers can help as you manage and grow your business.
As you think about this growth, it’s worth noting that a multi-prime environment is not a one-size-fits-all solution. Depending on your fund’s size, strategy, and financing requirements, working with a single prime could potentially suit your needs; however, funds often reach a point in their lifecycle where they benefit from working with more than one prime broker.
How to evaluate a complementary prime broker
There are several characteristics you should consider when looking to diversify your prime brokerage counterparties, including the institution’s business model, risk profile, and balance sheet strength and flexibility. Value-added services and a differentiated product offering are often points which drive informed decisions on adding a prime broker. Along with product offering, the source of securities lending supply, and financing capabilities, a counterparty’s stability in weathering volatile markets can be a key differentiator as you determine the best complimentary partner for you.
You may notice during your search that the prime brokerage marketplace is competitive and certain aspects of the business have become commoditized. To find true differentiation, you will need to dig a little deeper – look at a provider’s level of transparency in its financing costs and securities lending offering, its customer service, and ultimately its level of personalized attention. If adding new investors is a driving factor in your decision, take a closer look at the prime broker’s Cap Intro team – are they able to provide the resources and attention you’ll need to put yourself in a good position to attract new investors?
Hedge funds can gain an edge by having the right mix of prime broker relationships. For a true evaluation, review the products and services of your current prime and compare them to those offered by other firms. The goal is not to find a counterparty who mimics the strengths and offering of your existing provider, but rather to identify a prime broker who can help fill gaps and complement your current partner.
The value of the right relationships
The world of alternative investments is characterized by hedge fund managers who see opportunities where no one else does. It’s filled with financiers who look at the capital markets with a unique combination of quantitative analytics and creativity. That’s why the hedge fund is still very much a business built on relationships.
Hedge funds, like the majority of businesses, work most effectively when they have a diverse roster of business partners. Combining the strength of prime brokers with different risk profiles and complementary suites of services can enhance the alpha generating capabilities of a fund. The ultimate goal of a hedge fund is to deliver outperformance – and you can’t do so without working with a prime broker that helps to mitigate risk while helping you deal with the ever-increasing complexity of today’s investment landscape. For more insights on the trends that have changed the dynamics of the hedge fund/prime broker relationship, please read this article authored by Mark Aldoroty, head of Pershing’s Prime Services and Collateral Funding & Trading groups.
Aaron Steinberg is a director of sales and relationship management in the prime services division of BNY Mellon's Pershing, focused on financing and securities lending solutions for hedge funds, mutual funds and other alternative asset managers. He has almost 20 years of experience working with alternative investment managers.