Is Your Hedge Fund Ready to Add a Prime Broker?

Dennis ChenFu


Prime Services’ Dennis ChenFu explores the considerations for having multiple prime brokers and how to determine when the time is right for your fund.

Why should a hedge fund consider adding a prime broker?

There are four key reasons a hedge fund manager should consider adding a prime broker:

  1. Increased competition between a hedge fund’s prime brokers can lead to reduced financing costs, increased access to hard-to-borrow securities, and better margin levels.
  2. Working with multiple primes can provide a wide array of market expertise and product and service offerings. This is especially true for funds utilizing a traditional bulge bracket prime broker and adding a custodian-owned prime such as BNY Mellon | Pershing.
  3. Many funds are diversifying their counterparty risk by working with two or more primes with different risk profiles and balance sheets.
  4. Having multiple prime brokers can help a fund reduce operational risk and broaden contingency planning options should one of their primes malfunction.

When is the right time to add a prime broker?

There are three crucial questions you must answer when considering adding a prime broker.

First, are your teams and systems ready for the added operational complexity? You may consider adding headcount to take on the daily portfolio reconciliation work that comes along with having multiple prime brokers. You also need to adopt a method for aggregating your portfolio across multiple primes, either via a spreadsheet or purchasing a third party portfolio management system, depending on budget or available resources.

Second, are you ready to diversify financing and securities lending providers? If you have reached the $100 million or greater threshold, you may find value in adding a prime – whether to diversify your financing, securities lending, risk counterparties, or even capital introductions services.

Lastly, you must ask yourself how you will split your balances and wallet among your prime brokers. Funds are more likely to allocate balances to a prime broker with an affinity to a specific strategy or asset class, so understanding the prime’s balance sheet is key here. Also, get to know the prime’s risk tolerance to determine how to allocate balances in a capital-efficient way. In addition, developing a meaningful relationship with the prime broker’s securities lending desk and relationship management team will be beneficial as you generate alpha on the short side of your portfolio.

Deciding to add a new prime broker relationship and subsequently selecting and on-boarding a prime broker takes time and requires you to plan ahead. Pershing is here to help. Our experienced team has practical working knowledge to help you make the best decision for your business. Contact us to learn more.

Dennis ChenFu

Dennis ChenFu

Dennis ChenFu is a Vice President for the Prime Services division of BNY Mellon | Pershing, based in Los Angeles. He is responsible for new business development on the West Coast as well as managing existing relationships with alternative asset managers. Dennis also helps clients and prospects with financing, liquidity and operational efficiencies.