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Prime brokers vie for blue-chip hedge funds

Date: Tuesday, October 13, 2009
Author: Dealscape

Credit may be hard to come by if you're a small business owner, but if you're a hedge fund, particularly of the blue-chip variety, you're probably not complaining.

Prime brokers, having retrenched following the collapse of Lehman Brothers Holdings Inc., are now vying for business from blue-chip hedge funds by extending credit and cutting fees, according to Reuters.

Prime brokerage is an industry in flux, and the most recent trend is indicative of a larger shift.

Following the collapse of Lehman Brothers, funds began switching to a multiprime brokerage model instead of using one main institution. This has forced the largest prime brokers, which depended on those monogamous relationships for a sweet chunk of revenue, to explore ways to attract new business.

In September, J.P. Morgan Chase & Co. (NYSE:JPM) announced that it had created a combined prime brokerage-custodial platform -- the first of its kind -- "to help fund managers broaden their trading and assure investors that assets wouldn't be tied up by a brokerage failure like the one that felled Lehman Brothers Holdings Inc.," Bloomberg explained.

Another result is that smaller funds no longer make economic sense for the largest prime brokers to service.

Writes Peter Curley, managing partner of software firm Nirvana Solutions:

Historically the group charged with picking up the crumbs left by the leading primes was a group known as the mini-primes. This term is rapidly becoming obsolete as the mini-primes now find themselves expanding their offerings to attract the funds that have been displaced.

Two important differences remain: 1 - The mini's still use the clearing services of their larger prime broker brethren, and 2 - more importantly, their cost-structures evolved in a way that allows them to offer prime services profitably at this lower end of the market

These changes are no doubt positive. The more that boutique firms can compete in a marketplace that has so long been dominated by only a few names, the better. And the more aware hedge funds are of risk, the safer it will be for every investor. - Sara Behunek