Banks go toe to toe as Wall Street woos hedge funds |
Date: Friday, November 5, 2010
Author: Emily Chasan and Ross Kerber, Reuters
The battle to be the top dog in the lucrative business of clearing trades and
lending money to hedge funds is heating up as a handful of U.S. and European
banks are intensifying their push into the space. Citigroup (C.N),
Bank of America Corp (BAC.N)
and other commercial banks are trying to win market share in prime brokerage,
which provides services to some of the world's biggest and best trading shops.
But it will not be easy. Goldman Sachs Group (GS.N)
and Morgan Stanley (MS.N)
have dominated the business for years, and JPMorgan Chase (JPM.N)
joined the top of the rankings after acquiring Bear Stearns' operation during
the financial crisis. Prime brokerage is a big business, generating more than $9 billion (5.5
billion pounds) of revenue for Wall Street in 2009, according to the Tabb Group
research and consulting firm. And for the winners, the spoils can be impressive. Prime brokerages can have
a multiplier effect on a bank, acting as a gateway to introduce hedge funds to
other, even more lucrative, services. Hedge funds have also expanded the market themselves by using more than one
prime broker in the wake of the financial crisis. Tabb finds that hedge funds
now have an average of 2.6 prime brokers, compared with just one before the
crisis, so there could be opportunities for competitors to win business. But firms are battling for a piece of a smaller pie, given that prime
brokerage revenues this year are still expected to rank below the pre-crisis
level of around $11.5 billion. "To get business from one of the top tier players, you're going to have to
make an offering that has a more specialized approach," said Tabb Group senior
analyst Matthew Simon. The second-tier players are also trying to dethrone the leaders through new
investments, consolidation or by picking off employees at rivals with
long-standing relationships with hedge funds. For instance, Citigroup reports adding more than 70 people to its operation
this year in a bid to attract more hedge fund customers. Bank of America is making its presence felt after picking up Merrill Lynch's
prime brokerage business when it acquired the Wall Street investment firm during
the height of the financial crisis. The Charlotte, North Carolina-based bank says it has added about 300 new
hedge fund clients this year. Assets under management at its prime brokerage
more than doubled from 2009 to 2010, the largest gain of any firm in an industry
survey this year by AR Magazine. "We're picking up market share and balances so when leverage does return, we
would expect to see a significant jump in terms of business," said Syl Chackman,
co-head of global markets financing and futures at Bank of America Merrill
Lynch. COMPETING WITH ITS FORMER BUSINESS Bank of America's push is something of a surprise, given that the company
sold its prime brokerage business to BNP Paribas SA (BNPP.PA)
for about $300 million in early 2008.
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