In the secretive $2.1 trillion hedge fund industry few executives are keen to reveal who has lost out. Prime Brokers Culling Small Hedge Fund Clients - Focuses On Bigger Hedge Fund Traders
“Prime brokers are absolutely trimming hedge fund clients. They’re putting more and more focus on key clients. They’ve got less manpower and physical resources,” said one well-placed industry source who asked not to be named. “A number of prime brokers told they’re focusing on key accounts to increase their share of wallet. If you grow from 4 percent to 10 percent of a big fund’s trading flow. Prime brokers — who provide services such as stock lending and financing for hedge funds — are some cases starting to demand higher fees on trading or a greater share of a funds business or even telling hedge funds to look elsewhere.
Some prime brokers are sacking smaller hedge funds but retaining big hedge funds from the same house.”
Hedge funds typically use three prime brokers, who make money by lending money for trades or securities for short-selling, arranging custody for a fund’s assets, or even by finding office space or providing advice on regulation or risk management. Prime brokers can often look for a hedge fund firm to provide them with at least $250,000 of business per year, said one hedge fund executive, which would be a substantial amount for a manager with, say, $25 million in assets under management . Small hedge funds, most of who struggle to attract client cash since the credit crisis, or funds with little leverage or trading activity look less attractive to many banks, although in the secretive $2.1 trillion hedge fund industry few executives are keen to reveal who has lost out.
Small Hedge Fund Clients and Bigger Hedge Fund Traders.
A source close to Morgan Stanley said: “There is no change in strategy within the prime broking division and it maintains its focus on the same mix of clients.”
A number of top prime brokers were preparing to pass on increases to the cost of funding to hedge fund clients.
“If you’re a small hedge fund with $100 million of AUM (assets under management) and you have a strategy that’s not hugely leveraged, it may mean you’re not paying the broker very much,” said one prime broker who spoke on condition of anonymity. “Some (clients) can be very high maintenance, they can be calling your support teams twice a day.”
Biggest hedge funds are more lucrative for prime brokers, particularly when clients are in general making smaller trades than before the crisis.
Nearly 65 percent of the $2.1 trillion industry’s assets are with firms with more than $5 billion in assets, up from 58 percent three years ago, according to Hedge Fund Research.
In contrast, firms with less than $1 billion in assets control just 11 percent of industry assets, down from 14 percent three years ago. Who are the men running the biggest hedge funds in the world?
“It’s related to the idea that after 2008 not every fund was going to grow rapidly. Today if you take 10 in and incubate them for a while, a smaller number will grow rapidly,” said David Storrs, CEO of fund of funds Alternative Investment Group, who said prime brokers are culling “low pedigree managers.”
Banks can adopt a range of tactics with funds that are taking up their time without delivering sufficient revenue.
Some may demand a greater share of a hedge trading business, levy higher charges on trades or ask funds to post more collateral, in a bid to extract more revenue.
If funds still don’t provide enough revenue, then brokers can also axe services such as capital introduction — introducing them to their network of potential investors — in a bid to bring down costs.
“Some smaller hedge funds are talking to, they have much more margin to equity than the larger firms, and they are not able to segregate their assets from their prime brokers which the larger guys are able to do,” said one investor in hedge funds who talks to both small and large managers. “These things have only been getting worse this year in our experience. Prime Brokers are in many cases instead focusing on trying to capture even a sliver of business from the biggest and most active hedge fund traders, for instance Brevan Howard or Moore Capital, who can deliver tens of millions of dollars in commission to their main brokers.
Read more: CNBC