Enterprising Investor Forum

Prime Brokerage Tuesday, October 21, 2008

We had a few emails asking about more details on prime brokers and what they do.. here is a great explanation:

Prime brokerage is the generic name for a bundled package of services offered by investment banks and securities firms to hedge funds and other professional investors needing the ability to borrow securities and cash to be able to invest on a leveraged basis and achieve an absolute return. The business advantage to a hedge fund of using a Prime Broker is that the Prime Broker provides a centralized securities clearing facility for the hedge fund, and the hedge fund’s collateral requirements are netted across all deals handled by the Prime Broker. The Prime Broker benefits by earning fees (“spreads”) on financing the client’s long and short cash and security positions, and by charging, in some cases, fees for clearing and/or other services. It also earns money by hypothecating the portfolios of the hedge funds it services and charging a fee to those borrowing securities and other investments.

The following services are typically bundled into the Prime Brokerage package:

• global custody (including clearing, custody, and asset servicing)
• Securities lending
• Financing (to facilitate leverage of client assets)
• Customized Technology (provide hedge fund managers with portfolio reporting needed to effectively manage money)
• Operational Support (prime brokers act as a hedge fund’s primary operations contact with all other broker dealers)

In addition, certain prime brokers provide additional “value-added” services, which may include some or all of the following:

• Capital Introduction – A process whereby the prime broker attempts to introduce its hedge fund clients to qualified hedge fund investors who have an interest in exploring new opportunities to make hedge fund investments.
• Office Space Leasing and Servicing – Certain prime brokers lease commercial real estate, and then sublease blocks of space to hedge fund tenants. These prime brokers typically provide a suite of on-site services for clients who utilize their space.
• Risk Management Advisory Services – The provision of risk analytic technology, sometimes supplemented by consulting by senior risk professionals.
• Consulting Services – A range of consulting / advisory services, typically provided to “start-up” hedge funds, and focused on issues associated with regulatory establishment requirements in the jurisdiction where the hedge fund manager will be resident, as well as in the jurisdiction(s) where the fund itself will be domiciled.

Read the full article on Wikipedia: here.