Prime Brokerage

Published on June 2016 | Categories: Documents | Downloads: 45 | Comments: 0 | Views: 1204
of 118
Download PDF   Embed   Report

Comments

Content

The Prime Brokerage Book

Believe that if you spend your time helping others get what they need or want that the relationships you build will bring you what you need. In this spirit I’m offering The Prime Brokerage Book for free to anyone who would like to learn more about this area.

This book is brought to you by:

and

The Prime Brokerage Book

The # 1 Most Popular Book and Website on Prime Brokerage

The Prime Brokerage Guide is a 100+ page book that on the prime brokerage industry. It is a free-to-access resource, a compilation of articles, tips, interviews, book reviews and surveys, which can also be found on PrimeBrokerageGuide.com.

The Prime Brokerage Guide may be a helpful resource to hedge fund managers who would like to learn more about prime broker trends, capital introduction services, counter party risk management, fees, or working with multiple prime brokers. The guide may also be helpful to those seeking careers or new clients from within the prime brokerage industry.

This resource can help you learn both the basics and more granular details about how the industry operates as a whole. If you have any prime brokerage questions or would like to contribute a resource for this guide please email us at [email protected].

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

2

The Prime Brokerage Book

Prime Brokerage Financing & Equity Services
Prime brokerage and counter-party risk management came up several times within conversations at the Hedge Fund Group (HFG) event in Chicago. Everyone we spoke with on this topic was an agreement that the following activities are leading to a flood of both small hedge fund startups and larger hedge fund businesses to look for additional prime brokerage relationships: Minimum fee charges of $25-30,000+ to remain a client of large prime brokerage firms High touch sales pitches which turn into low touch almost non-existent servicing once the hedge fund is a client of the prime broker Hedge funds wanting to lower custodian risk by multi-priming with 2-3 prime brokerage firms early on and then 3-5 prime brokers as their fund expands to over $750M or $1B in assets under management Capital introduction promises that are never delivered to the manager in any tangible way Large prime brokerage firms now often cutting out their clients who cannot product $20,000+ of business a month, they are too busy for these smaller accounts. This can sometimes lead to frustrating conversations for hedge fund managers who do not want to make changes right now and make changes to their trading or operations due to a switch in prime brokers If you have seen other reasons why the prime brokerage industry is evolving please send them in and we can add them to this list. If you are interested in working with a prime broker, which may offer multi-custodian solutions, technology and cap intro/marketing assistance please complete the form at the bottom of this page.

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

3

The Prime Brokerage Book

Challenges of Multiple Prime Brokers
Here is a short excerpt from a recent article by Hedge Fund Review on multiple prime brokerage challenges and costs. This is an issue we have discussed here on HedgeFundBlogger.com and PrimeBrokerageGuide.com a few times in the past. The main benefits of multi-priming pointed out within this article include:  Broader securities lending offerings  Competitive financing rates  Additional market research  More access to capital introduction resources  Spreading counterparty risk out over several prime brokers Here is the article excerpt: Historically, most hedge funds with assets greater than $1 billion have operated in a multi-prime environment while smaller funds tend to use a single prime model in order to simplify their operations. Today funds of all sizes are moving to the multi-prime model. This is primarily due to larger funds requiring access to a wide range of products and services that may not be available within a single prime brokerage relationship. Introducing competition and expanding the services available to them has become more important for the long-term success of small funds as well. Expanding to a multi-prime organization can result in some additional operational overhead. However, the benefits seen within this model are generally regarded as worth the added effort. Having multiple prime brokerage relationships gives funds access to broader securities lending offerings, competitive financing rates, additional market research and more capital introduction services. read more...

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

4

The Prime Brokerage Book

How to Start A Hedge Fund | Advice & Resources
We receive many emails asking how to start a hedge fund, or what resources we have for those looking to start a new hedge fund. Over the past year we have worked with over 200 hedge fund startups in various capacities. Below please find links to some of our hedge fund startup related advice and tips: Top 5 Tips for Starting a Hedge Fund (Part 1 of 2) Top 5 Tips for Starting a Hedge Fund (Part 2 of 2) Raising Capital With Tenacity Hedge Fund Marketing Tools Hedge Fund Seeding Setup a Hedge Fund Hedge Fund Formation | Tips on Forming a Hedge Fund CHA Designation | Benefits to Hedge Fund Startups Hedge Fund Public Relations Hedge Fund Seed Capital Starting a Hedge Fund | A Sample Timeline How to Start A Hedge Fund Hedge Fund Backers | A List of Capital Sources for Hedge Funds Email Newsletter Creation Tool Hedge Fund Ethics Seed Capital Sources Financial Advisor Marketing Marketing to Institutional Investors Third Party Marketing

The Hedge Fund Transparency Act
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 5

The Prime Brokerage Book

Just about to jump on a plane so I don't have must time to write up much of a summary here but two senators have proposed new legislature, which would force hedge funds to register with federal securities regulators. There is a 90% chance that this quickly be approved: The Hedge Fund Transparency Act, sponsored by Senators Carl Levin, a Michigan Democrat, and Charles Grassley, an Iowa Republican, would require hedge funds to file an annual disclosure form with the U.S. Securities and Exchange Commission, comply with the agency‘s recordkeeping standards and cooperate with its investigations. ―The problem is that hedge funds have gotten so big and are so entrenched in U.S. financial markets that their actions can now significantly impact market prices, damage other market participants and can even endanger the U.S. financial system and economy as a whole,‖ Levin said... ―A major cause of the current crisis is a lack of transparency. The wizards on Wall Street figured out a million clever ways to avoid the transparency sought by the securities regulations adopted during the 1930s,‖ said Grassley, who introduced a similar bill in 2007. read more

CA MA CT NY | Directory of Funds

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

6

The Prime Brokerage Book

Over the last 12 months our team has received around 100,000 emails from professionals who have came and visited our websites. Many of these emails are in regards to accessing particular resources to help in career or potential client searches. Below please find various state-by-state hedge fund manager contact lists available for under $100 each. These contain contact details for various funds and may be instantly downloaded. List of Hedge Funds in Massachusetts List of Hedge Funds In Connecticut List of Hedge Funds in New York List of Hedge Funds in California List of Hedge Funds in Chicago and State of Illinois List of Hedge Funds in Dallas, Houston & State of Texas If you have been directed to this post via email we apologize for the less than personal response, please email us again if you have any further questions or concerns.

Prime Brokerage OTC Derivative Arrangements
(http://PrimeBrokerageGuide.com) A recent article by Alex Akesson noted that some large prime brokerage shops are now ending any OTC give up arrangements that their hedge fund clients had previously put into place. For many hedge funds these changes are happening right now - and for many more it will probably occur before the beginning of Q3 of 2009. Here is the article excerpt mentioned above: Hedge funds of varying sizes report being given notice by prime brokers that OTC derivative give up arrangements will end - quickly. Funds ranging in size from $25M to $2.5B are being told new derivative trades "done away" will no longer be accepted near the end of the first quarter and that give up relationships will end completely in April. ‗Give up arrangements‘ are where the executing broker writes trade tickets

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

7

The Prime Brokerage Book

on behalf of both counterparties to the trade – provided hedge funds with three advantages: easier post-trade operations, cross margining and credit intermediation. ―Challenged by investors to provide increasing levels of transparency, independent validation and reporting frequency, funds would also have to find the operational bandwidth and capability to efficiently manage the complexities of OTC trade processing involving multiple instruments, high volumes and multiple counterparties." Hans Hufschmid, CEO of GlobeOp Financial Services commented, "And the February 28 deadline after which major dealers will not accept novation consents by email looms.‖ source

Prime Brokerage Services for Small Funds
Just found an article from today within the WSJ which discusses how many banks and prime brokerage firms are cutting off services to some of their funds, which they deem too small (under $200M) or exotic. This is due to necessary cost cutting, risk management and balance sheet clean up projects. Many large shops are segmenting clients into 2-5 lists with the smallest or most exotic funds being the first to be cut from their services such as custody or lending. While those within the industry know that this has been going on for some time now I don't believe the full force of it will be felt until Q3 or Q4 of 2009. Here is the WSJ article excerpt: Brokerage firms are reducing financing and other services to hundreds of hedge funds, in a move that could accelerate the shakeout among these heavy-hitting investors. Under financial pressure, securities firms are dividing their hedge-fund clients into lists of those they consider best able to weather the financial turmoil and those they're less sure of. The result is that more funds may have to merge, find other financing at higher cost or close. source

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

8

The Prime Brokerage Book

Hedge Fund Service Provider Branding & PR
The value placed upon the brand of service provider hedge funds and private equity firms are employed has doubled in the past 9 months. This is due to Lehman Brothers, Bear Stearns, Madoff and others. In each of these cases the common thread was the creation of or fault of un-reliable or unstable service providers. Some hedge funds in London had 100% of their assets frozen within Lehman‘s custody services, partnered banks and hedge funds fled Bear Stearns as it sank and Madoff‘s fund raised half a dozen red flags from in house administration and self clearing to working with a 2 person auditing firm. The result is an effort by many to mitigate counter-party risk and conduct research on those who have been traditionally responsible for providing fund due diligence services. Fund managers are feeling pressure from hedge fund and private equity board members and investors to rely on well known and vetted service providers rather than trying to save 20% in fees by working with a local or lower cost operation. Protecting the brand of your own hedge fund or private equity fund is more important than ever. Rumors of gating clauses being enacted or redemption requests spiking within a single fund can spread around the world in less than 3 days. False rumors can cause investors to act irrationally and began to question the quality of a fund‘s team or operations. As these two industries develop further many funds will continue to expand their use of public relations firms and many funds may need to have public relations plans in place to counter false rumors and be ready to act; this could be just as important to have in place as a disaster recovery system.

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

9

The Prime Brokerage Book

Hedge Fund Pitch Book
Marketing Materials Tips Below is a list of my top 10 tips to those professionals who are looking to create a pitch book for their hedge fund. My advise to both $30M and $1M hedge funds is that you can never start this process early enough, it is an iterative constantly evolving project which will never be complete. Here are the top 10 tips for creating your hedge fund marketing materials.  Think long-term. Invest in creating a robust institutional quality pitch book the first time around and complete 5 drafts of it internally before showing it to a single investor.  Stress your team, investment process and risk management controls and how they all interact inside the operations of your hedge fund.  Make your competitive advantage clear and do not rely upon canned phrases such as ―positive returns within bull or bear markets‖ anyone who reviews hedge fund materials for a living see these by the hour. Your advantage must be unique.  Stress the importance and individual functions of your team, your experiences and pedigree. This should be the foundation upon which everything else is built.  Do not send any pitch book or marketing material out before speaking with a qualified compliance or legal counsel on your team.  Create a one page marketing sheet, full 13-20+ page PowerPoint presentation and one page newsletter which would be released monthly providing your view of the markets within your niche area of expertise.  Work with high caliber service providers so that you don‘t bring extra skepticism upon a relatively new fund, which may already be scrutinized by potential investors and advisors.  Use your whole team and prime brokerage business partners and other service providers to improve your marketing materials. Professionals who work in prime brokerage or administration see many types of marketing materials and can help provide valuable feedback at no
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 10

The Prime Brokerage Book

additional cost to your fund.  Do not create a PowerPoint presentation that is longer than 30 pages. There are some institutional money managers who run 3 similar funds and will sometimes cover each of these within a single presentation, but this is the exception. 95% of the people who you will send the PowerPoint presentation to will not ready more than 15 pages of the material unless you are walking them through it over the phone or in person.  Purchase the rights to graphics, choose a unique, simple and professional layout for the presentation and use the new Windows Vista diagramming tools to create institutional quality presentation. Coming into a meeting with a word document or 25 pages of bullet points is not very effective. It is hard enough to catch an investors‘ attention and bring them to the table to discuss your fund, you don‘t want to lose them due to the aesthetics of your PowerPoint.

Blood On The Hedge Fund Streets
While the economic conditions have shut down many funds, exposed fraudulent activity, and also created a unique set of opportunities for a small subset of traders and portfolio managers within the industry. The hedge fund and private equity industries are as entrepreneurial as ever. In Q1 2009 there are hundreds of New York and London based hedge funds being started to take advantage of high volatility, historically low asset prices, and relatively cheap talent hungry for a fresh start. Many of these young hedge funds and private equity groups are not yet on the radar of institutional databases or mainstream media outlets but by Q3 and Q4 of 2009 they will be, and we will be able to see how many funds have been started around the world. I believe these figures will be high and will spur even more startup activity as others move to seize the current market opportunities.

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

11

The Prime Brokerage Book

Prime Brokerage Trends Article | TAAA
About 7 weeks ago I wrote up a small article for the TAAAPs newsletter. To read the full newsletter, please click here. Please see below for the full article that I wrote for TAAAps: Over the last two years the mainstream media‘s and general public‘s interest in prime brokerage has rapidly grown. This is due to a number of factors including the struggle and failure of many investment banks offering prime brokerage services, mergers within the industry, and widespread failures and redemption notices of hedge funds themselves. The top three trends affecting the prime brokerage industry right now are multi-prime brokerage relationships, limiting capital introduction services, and prime brokers acting as business partners to hedge fund managers. Multi-prime brokerage relationships had been used in the past by $5B+ hedge funds whose large institutional clients demanded the practice as a risk management technique. In the past this was almost thought of as unnecessary as no large investment banks offering prime services had collapsed. It was seen in the same light as a major economic superpower defaulting on its own investment notes. In 2008 everything changed, Lehman failed and many investment banks struggled or sold off their prime brokerage services to other firms. This has lead to widespread migrations between prime brokerage service providers and a trend towards managing multi-prime brokerage relationships for funds with over $500M in assets or even lower. Some funds as small as $5M are choosing to work with more than one prime brokerage firm from the very start to reduce their exposure to individual firm risk. A few firms have reported shutting down due to assets being locked up within Lehman Brothers when they collapsed earlier this year. Anyone offering capital introduction services lately has faced the increased challenges of investors sitting on cash, a poor market and overall industry performance, along with increasingly frequent reports of hedge fund fraud. Prime brokerage firms are not as heavily affected by this as would most independent hedge fund marketers, which are often referred to as third party marketers. A mitigating factor
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 12

The Prime Brokerage Book

being that prime brokers often take on and attempt to service more clients. This had led to more selective capital introduction service offerings by prime brokerage firms and more frequent partnerships between prime brokerage firms and third party marketers in the industry. The third major trend affecting the prime brokerage business is that more firms in the space are positioning themselves as business partners. This is due to the commoditized nature of the industry and high level of competition for new business. Prime brokerage firms are now publishing white papers, offering business plan and marketing plan startup tools, and holding workshops and networking events to help hedge fund managers connect with additional business partners and investors.

Independent Fund Administration
Tom Zita from Globe Op sent me an interesting article by Advanced Trading on independent fund administration and how fund of funds and investors will be requiring this more in 2009 than ever before. Here are a few great quotes from this article: "The failure of the funds of funds that invested with Madoff was simply that they didn't do the due diligence that they ought to have done," says Rich Koppel, managing director at youDevise Ltd., a supplier of hedge fund technology that has offices in London, New York and Hong Kong... "From where I sit in the fund-of-funds side, I've looked at [Madoff's] return stream several times and rejected it [based] on my gut," Vale adds. "It's checks and balances -- you have to check all the boxes." ... Infinity Capital's Vale speculates that the feeder funds "depended on the numbers that [Madoff's] underlying funds provided." Even though some of the underlying funds had third-party fund administrators, even the thirdparty administrators appear to have accepted Madoff's numbers. "Madoff was providing those numbers. Nobody dug a little bit deeper to see that
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 13

The Prime Brokerage Book

those numbers were just coming from in-house," Vale claims. "There was no third-party firm at all looking at the numbers to verify even if they were real or correct," Vale continues. "That's a deal killer for us."... "The major red flags were to do with predominantly back-office issues," adds James Freeman, senior relationship manager at Key Asset Management, a London-based fund of funds manager with $2 billion in assets invested in 90 underlying hedge funds. "A bad investment process can lose you lots of money, but a [bad] back-office business structure can lose you all of it," he warns. .. "All the major classic frauds -- Beacon Hill Asset Management and the Manhattan Fund -- use that tactic, [in which] the broker is the sole source of the quote [aka, net asset value] and it's not being reconciled by a thirdparty administrator, to send out false information because there is no record of it and you have no independent validation if the information is correct," says Freeman. read the full article

Prime Broker Market Share Changes
Below is a short article on how the market share between prime brokers is changing. Some banks are gaining over $1B a quarter in new assets while others are losing market share to those banks which appear to be less risky to hedge fund managers who are trying to lower counter-party risk. Here is the article excerpt: The collapse of Lehman Brothers last September was the flashpoint of a year that saw the prime brokerage world - along with that of its hedge fund clients - transformed by the ongoing credit crisis and grisly economic backdrop. But for those funds and brokers that come through the turbulence intact, the new landscape offers a broad range of opportunities for the coming years, according to Nick Roe, the London-based head of prime finance at Citi.

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

14

The Prime Brokerage Book

While the hedge fund assets that were locked up in London after Lehman Brothers International (Europe) went into administration garnered headlines for a while, Roe argues that just as important was the spotlight turned on rehypothecation - the use by prime brokers of hedge fund assets as collateral for the borrowing they need to provide funding to those clients. 'I believe the regulations regarding rehypothecation will change, with prime brokers forced into much more transparency,' he says. 'But it won't go away, because most hedge funds couldn't cope with the changed economic conditions if prime brokers weren't able to make use of some of their assets to deliver the required levels of funding.' source

Hedge Fund Industry Ethics
A few weeks ago I posted a note hoping to create a conversation around hedge fund industry ethics and best practices. Just this morning I found an interesting article on hedge fund ethics, again it appears that the most challenging part of setting any code of ethics for the industry is that hedge fund manager are so diverse, their operations, investments, and even scheduled life-spans are often drastically different from one fund to the next. As hedge funds are forced to innovate to produce returns in 2009 while also securing capital for distressed assets I believe this diversity will only increase over the next few years. Here is the article on hedge fund ethics: Hedge funds took a battering 2008 - and as they have been battered by the storm two questions of "right" and "wrong" have been coming up that show that there are ethical codes at work here, but no agreement on what the "right" answer is. And here's where the "ethical" questions come up: If your fund is down and you know it is going to take years to recoup the losses and get paid at 20% of profits again do you:

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

15

The Prime Brokerage Book

a) stay with the fund until you have recouped the losses and made your investors whole - working for "psychic income" as Kenneth Griffin of Citadel fame told the New York Times or b) leave - retire, switch to a new fund, start a few fund - basically start again? If you had many years of excellent performance before this one terrible year you may well be able to raise another fund. In the first case there's a moral high ground to climbing back out and keeping your commitments to your investors, but maybe the second case makes sense if you can't climb back out from that fund. Maybe you can't keep your key players or your strategy no longer works and your investors are better off with you closing the fund and returning their money. The second question is whether to allow investors to take money out of the hedge fund. Again hedge funds are not acting consistently. One of your investors wants to pull his money out - do you: a) allow him to knowing that doing so could hurt the remaining investors that are staying in because you'll be forced to selling into a falling market? Much of the volatility in November and December was redemption selling as hedge funds were force to liquidate equities and debt so investors could withdraw funds. Or do you b) tell investors they can't take their money out and you are going to hold it until it is a more stable time to sell? Again this is a current raging debate in the hedge fund world that takes on the ethical language of right and wrong. I know I'd want to be able to get my money out if I'd lost faith in a fund! source

Prime Brokerage Services Q&A
Question: What Services do Prime Brokerage Firms Provide? Answer: I recently found a detailed answer to this question within the Preqin Global Hedge Fund Investor book. Here it is:
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 16

The Prime Brokerage Book

Prime brokers provide trading and financing services to hedge funds. Prime brokerage is the common name for the package of services offered by investment banks and securities firms to hedge fund and other investors allowing them to borrow securities and cash to be able to invest on a leveraged basis and achieve an absolute return. The prime broker is able to provide a centralized securities clearing facility for the hedge fund and then benefits by earning fees on financing the client‘s long and short cash and security positions and by charging fees for clearing and other services. It also earns money by hypothecating the portfolios of the hedge funds it services.

Capital Introduction Q & A
Question: What are capital introductions services? Should our firm be using them? We are based in Miami, any help would be appreciated. Answer: I recently found a detailed answer to this question within the Preqin Global Hedge Fund Investor book: Capital introduction is the service 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. Some prime brokers will offer a physical capital introduction service arranging meetings and events where the managers are able to meet investors. Others will partner with a third party marketer or offer a particular marketing plan to hedge fund managers who have not attempted to raise assets before. This service is popular with hedge fund managers and can lead to new business for the prime brokerage firm. My background is in capital raising and I am now associated with a prime brokerage firm which offers capital introduction services. If you are looking for prime brokerage or capital introduction services please get in touch with our team and we will help as we can.

Where are Prime Brokers Located?
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 17

The Prime Brokerage Book

Question: I am looking to work with a local prime brokerage firm, do you know where most of them are located? Answer: Within a recent survey of prime brokerage firms I found some interesting statistics on prime brokerage firms. Here are the numbers: 74% of firms were based within the United States 13% in London 3% in Canada 2% in France 2% in Poland 2% in India 2% in Russia 2% in Germany I found the Russia, Germany and France numbers to be surprising. I was also surprised that Asian countries didn‘t break 2-4% of this list. Perhaps this has to do with regulations and fund structures and terms used within that area of the world. These statistics were taken from the recently published 2009 Preqin Global Hedge Fund Investor Book.

A Guide to Overcoming the Operational Challenge of Multi-Prime Brokerage
Introduction The ongoing market turmoil, the bankruptcy of Lehman Brothers leaving $65 Billion in frozen hedge funds assets, and the doubts surrounding the leading primes have accelerated the demise of the already faltering single prime brokerage model. Single primed funds that had been slow to embrace the new multi-prime world are now highly motivated to reduce counter-party risk by establishing multiple custodial relationships. This guide explores the different options available to a single primed fund that is making the leap to multi-prime. It begins by describing

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

18

The Prime Brokerage Book

the nature of the operational challenge, then weighs the pros and cons of today's multi-prime solutions, and concludes with a recommendation. The Operational Challenge of Multi-Prime Once a fund accepts the necessity of multiple prime relationships there quickly follows the realization that there is a cost associated with this new model. This cost, which is in the form of operational complexity and the need to acquire middle and back-office functionality, had been borne by the prime in the single prime model. At the very core of this complexity is the requirement to collect and aggregate the disparate cash, position, and transaction information, across multiple primes. Once the data are captured and reconciled the fund must then be able to present the data in real-time and historical, views and reports, which allows the fund to understand key measures such as P&L, performance, exposures and risk. Additionally, since the data are so critical to so many constituencies it must be flexible enough to meet the specific needs of everyone across the firm. Likely users include the trader, the portfolio manager, the compliance officer, the COO, the CFO, Operations and indeed ultimately external investors. Further complicating matters is the certainty that as the expanded search for alpha continues to drive funds far beyond their domestic long/short equity roots, the middle and back-office must now be capable of handling multi-currency, global securities, and derivatives, all across multiple timezones. Much consideration must be given to how a firm deals with this operational challenge since many of the available solutions involve a fund going in a direction that risks distracting them from their central purpose of alpha generation. At the heart of all multi-prime solutions is the portfolio management system (PMS). Before we explore the attributes of the multi-prime PMS let's briefly look at the three key building blocks necessary to ensure that the PMS displays relevant, accurate and timely data. The 3 Building Blocks of a Multi-Prime Solution 1 - Allocation - An effective allocation process ensures that the PMS has the ability to 'slice and dice' views and reports in a manner that is
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 19

The Prime Brokerage Book

sufficiently flexible to meet the information needs of the particular end user. At the highest level it involves a process of identifying and categorizing trades down to the tax-lot level. Once these positions have been correctly categorized it becomes possible for the PMS to generate reports based on these categories. More sophisticated allocation methods allow for a layered approach so that reporting can be multi-leveled. An example would be a CFO who would like to understand the P&L attributed to a particular portfolio manager, who is associated with a specific strategy within a particular fund. The data can be quickly viewed assuming that the allocation has been correctly completed and that the PMS is capable of this multi-tiered reporting. Allocation is usually handled by an Order Management System (OMS). It is vital that the OMS and PMS share the same allocation methodology or the reporting flexibility of the PMS will be compromised. - Data Capture - The subject of data capture becomes particularly important in a multi-prime environment. The data that the PMS displays will only be as good as the quality and the timeliness of the information flow between the relevant counter-parties. It is imperative that the solution can send and receive the file formats demanded by primes, fund administrators, executing brokers and market data vendors. Formats such as flat-file, XML, SWIFT and increasingly FIX are prerequisites for any modern solution. To further complicate the process, a robust security master must be at the core of the data capture process. The security master ensures that data across multiple primes is normalized so as to allow seamless integration. In addition, a security master that includes independent corporate action verification will serve as a check and balance to the primes‘ corporate action reporting. -Reconciliation (and Exception Processing) - The reconciliation process ensures the accuracy of the firm's data and involves the fund comparing what it understands to be its trading activity with the records of other counter-parties, such as the primes or the fund administrator. Ideally the process is automated and ensures that differences or exceptions between the various parties are discovered and corrected as soon as possible. Once these errors are discovered the PMS should have the ability to unwind the error in a one-step process.

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

20

The Prime Brokerage Book

The Portfolio Management System in a Multi-Prime World The PMS has always been the most important hedge fund application because it is responsible for generating its books and records. This query able repository of a fund's activity is used as a tool to understand how successful a fund's alpha generation efforts have been in terms of performance and risk, and is critical in a multi-prime environment. It is no surprise that the evolution of the PMS has mirrored (and in many cases lagged) the evolution of the hedge fund industry. The first hedge fund PMSs that emerged 20 years ago were essentially re-purposed vendor solutions from the long-only asset management industry. As funds push beyond domestic long/short equity strategies these same vendors have responded, with varying levels of success, by grafting on the functionality required to support multi-currency, multi-market and multiasset class. Arguably, the biggest demand placed on the PMS by this new complex multi-prime world, and the demand that legacy systems most struggle with, is the requirement for true real-time views of data. Funds today require a real-time understanding of their strategies' performance and risk. This is particularly true in light of today's market volatility. Alpha has become increasingly fleeting in nature and funds now must be able to respond instantly to changing market conditions. Many legacy systems struggle with this real-time requirement because their architecture pre-dates the widespread adoption of the FIX protocol. To understand this we only need to look at how FIX has dramatically increased the flow of trading information into and out of the front office. This urgency of information flow is now making its way to the middle and back-office. Legacy PMSs that were built in a "T+1" world cannot reflect the real-time effect of trade execution on performance and risk because they cannot accept FIX messages. Only a PMS built around a FIX engine can offer data that is updated both tick-by-tick and execution-by-execution. (For a complete depiction of the typical workflow of a real-time multi-prime solution please see Figure 1 on Page 6) Today's Multi-Prime Solutions
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 21

The Prime Brokerage Book

Various industry players have sought to offer a solution to the operational burden of multi-prime. In choosing one of these solutions, funds typically face a tough trade-off, which at its most basic level involves a choice between cost and control. Hedge funds that do not have the financial and human resources, and are willing to live with less control typically choose a less costly outsourced solution. Funds that have more resources and demand complete control of their data take the time and expense to buildout an onsite system. Let's look at the four most popular solutions available today. Prime Broker (Outsourced) - "Hearsay Reporting" - Hearsay reporting is when one prime (usually the original prime) agrees to accept and aggregate the trading files from other primes on to their reporting platform. The advantage to this approach, from the hedge fund's perspective, is that the original prime shoulders all the operational complexity of going multiprime. Not much changes for the hedge fund. They continue to receive their familiar reports but now including an aggregated view of all their relationships. There are, however, a number of significant drawbacks to this approach. First, not many primes are willing to play the role of "the prime of primes". Primes that offer this service will weigh up whether retaining a now smaller portion of a fund's business is worth taking on the cost of the very manual task of hearsay reporting. Anecdotal evidence suggests that the top tier primes are not willing to offer this service unless a fund has at least $1 Billion in assets. Additionally, as the fund adds more and more primes the original prime will find it less compelling to offer the service. Second, hearsay is a very manual process and is only as good as the data received. Factor in the possible resentment of the prime offering the service it is not surprising if accuracy suffers. Third, hearsay does not sufficiently reduce a firm's dependence on a single prime. Any problems associated with the prime offering the hearsay reporting will mean that the fund will have to scramble to replace their reporting infrastructure. Finally, this solution only goes part of the way to solving the reporting problem. This is because most hearsay solutions rely on legacy PMSs that are based on a T+1 process and therefore cannot offer a real-time understanding of P&L and Risk. Mini-Prime Broker - A subcategory of the Prime Brokerage industry is a
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 22

The Prime Brokerage Book

group known as the Mini-Primes. They typically use the clearing services of larger institutions and traditionally served the funds that the bulge-bracket primes deemed to be too small or risky. Their value proposition has been around better service at lower cost for the little guy. The turmoil surrounding the leading primes has meant a mass exodus of many smaller funds towards these mini-primes. Some of these mini-primes offer relatively robust hearsay reporting. They, however, suffer from many of the drawbacks of their larger brethren. (Tri-Party Arrangement - Another variant of the prime model is a hybrid between a custodial bank and a prime brokerage. This involves a fund maintaining its long positions at custodial banks while using a prime or primes for stock loan and leverage. It is mentioned here because this model is becoming an increasingly popular way for funds to diversify their counterparty risk.) Fund Administrator (Outsourced) - "Middle and Back Office" - The fund admin would appear to be the obvious candidate to provide a multi-prime aggregation service. After all, traditionally the admin is responsible for aggregating all of a fund‘s activities to produce monthly financial statements and NAV calculations. Indeed, many fund admins have moved in the direction of offering outsourced middle and back office services. To date, however, these offerings have not been met with great enthusiasm from the hedge fund community. The typical complaint is that the reporting provided by the admin is just not flexible or timely enough for many hedge funds. The reason for this is that the vast majority of admins rely on the legacy portfolio management systems mentioned above and therefore struggle with flexibility and in particular the ability to offer true-real time P&L and risk. Finally, and a not to be underestimated factor, is that there exists a cultural mismatch between the accounting mindset of the fund admin and the trading mindset of many of the hedge funds they seek to service. Microsoft Excel (Onsite) – Some firms attempt to overcome the operational complexity of multi-prime by using Excel. This is particularly true for firms that relied heavily on Excel to augment the reporting capabilities offered by their original single prime. It is true that Excel is a very flexible tool but there are many drawbacks to this approach. One, quite simply, the days of an investor willing to write a $50 million check to a fund that has no formalized
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 23

The Prime Brokerage Book

infrastructure are long since gone. Investors now spend almost as much time doing operational due diligence as they do research into a firm‘s risk and return profile. Two, Excel is not built to handle real-time decisionmaking. Three, funds that delay implementing a viable long term solution will find that Excel becomes engrained in their workflow and that over time more and more internal resources will be expended just to maintain this sub-optimal solution. Legacy (Onsite) - For ultimate control of their multi-prime data a fund typically feels that their only option is to acquire an onsite PMS, OMS and increasingly an execution management system (EMS). This comes at a considerable cost and usually involves hiring a team of technologists to implement, integrate and maintain these disparate legacy systems. With all this a fund may still find that the data that they demand are still elusive and that a considerable amount of time has been wasted in building a competency in technology when the firm‘s primary focus should have been alpha generation. A New Approach - Nirvana Solutions Nirvana Solutions‘ purpose built approach for hedge funds dispenses with the usual trade-off between cost and control, by combining the best attributes of the outsourced and onsite models. It involves a single integrated solution that includes a real-time portfolio management system built around a trading engine, all made available through the Software as a Service (SaaS) deployment model. It places the FIX enabled portfolio management system at the very heart of all of a hedge fund's activities. This single real-time database architecture ensures that everyone in the front, middle and back office shares access to the same real-time and historical information displayed in a form specific to their role. Furthermore the SaaS model ensures that a firm‘s focus remains on alpha generation and not on IT support. Conclusion The credit crisis has brought home to the hedge fund community the risks associated with the captive single prime broker model. As funds embrace the world of multi-prime they are discovering that the accompanying operational burden must somehow be addressed. There are a number of competing solutions available to this problem, funds however, must realize
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 24

The Prime Brokerage Book

that the capabilities of these solutions vary greatly, particularly in terms of their ability to offer true real-time views of P&L and Risk, and in the amount of IT support required. Both of these factors are now critical in this new era of increased volatility and depressed returns.

Hedge Fund Managers | Manager Profiles & Notes
Below is a tool developed by HedgeFundBlogger.com, which provides profiles, news and trend notes on hundreds of hedge fund managers. Hedge Fund Manager Tracker Profiles: Abax Global Capital Management Absolute Capital Artradis Fund Management Management | Jonathan LP Treacher Asset Management Finance Acorn Capital Group Corp AguasClaras Investimentos Atticus Capital Alternatives Derivatives & Autonomy Capital Research, Investments (ADI) LLP Analytix Capital Avenue Capital Group Anchor Point Capital LLC | Babylon Fund LP | Hedge Albert Hsu Case Fund Notes Andor Capital Management & Balyasny Asset Management Daniel Benton LP Angelo Gordon Barington Capital Group LP | Appaloosa Management Hedge Fund Notes Aquiline Capital Partners Bessent Capital Arcanum Capital BlueCrest Capital
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 25

The Prime Brokerage Book

Blue Mountain Capital Managment,LP BlueBay Asset Management Bonanza Master Fund LP | Hedge Fund Notes Boussard & Gavaudan Bramdean Asset Management Brevan Howard Bridgewater Capital Brotman Capital Management Hedge Fund Brummer & Partners, LP Cambridge Place Investment Management Carlson Capital Management Partners LP | Hedge Fund Notes Centaurus Capital Cerberus Capital Management LP CF Partners | Carbon Hedge Fund Chenavari Credit Partners LP Cheyne Capital Children's Investment Fund Management TCI Citadel Investment Group LLC Clarium Capital Management | Peter Thiel Clinton Capital Management LP | Hedge Fund Notes Connexion Capital Creditor Liquidity Solutions LP CQS Capital Dalton Strategic Partnership
PrimeBrokerageGuide.com

Davidson Kempner Capital Deephaven Capital Management, LLC DE Shaw Group Diapason Commodities Management SA | Commodity Management Drake Capital Management LLC Drury Capital CTA Fund Durrant Capital Management, LP Eclectica Asset Management Ellington Management Epic Capital Management LP Eurasia Capital Management ESL Investments | Edward Lampert Farallon Capital Management Partners LP Financial Risk Management (FRM) Investment Management First State Investments | Media Works Fortelus Capital Management Fortis Investments Hedge Fund Fortress Investment Group LLC Four Elements Capital Management Four Elements Capital Management, LP Goldman Sachs Hedge Fund Goldman Sachs Hedge Fund Launch Gottex Fund Management
26

PrimebrokerageAssociation.org

The Prime Brokerage Book

Greylock Capital Management Halcyon Asset Management Harbinger Capital Partners Hedge Fund Headline Investment Management Hedge Fund BullDog Fund Sues SEC Henderson Group PLC Highbridge Capital Management LLC Highland Capital Management Jabre Capital Partners SA | Philippe Jabre Jana Partners | Hedge Fund Notes JO Hambro Capital Management Ltd. Juridica Investments Kenmar Group K2 Advisors Lansdowne Partners | Paul Ruddock Lasair Capital LP Lawrence Asset Management LP L & G Investment Management Lucas Capital Management Man Investments Group Martin Asset Management Maverick Capital LP MedCap Management and Research | Charles Toney Metropolitan Capital Advisors
PrimeBrokerageGuide.com

Millennium Partners Mitsui & Co. Moore Capital Management, LP New Star Asset Management OakRun Capital LLC Och Ziff Capital Management Group Olympia Capital Management Oracle Evolution Oracle Services | Spiro Germenis Ospraie Management LLC Oxford Funding Corporation Palatine Asset Management Paskewitz Asset Management Paulson Invesment Company Pequot Capital Management Hedge Fund Perry Capital Pershing Square Capital Management Pharos Fund Pirate Capital Platinum Asset Management Platinum Grove Asset Management, LP Powe Capital Management LP | Rory Powe Priapus Investment Fund LLC Psigma Investment Management Pure Capital LP Quadrangle Group LLC R3 Capital Partners LP RAB Capital Plc Rady Asset Management
27

PrimebrokerageAssociation.org

The Prime Brokerage Book

Ramius Capital Group LLC Tenaska Capital Management Renaissance Technologies LP | Hedge Fund Notes Ritchie Capital Thames River Capital RMB Asset Management The Blackstone Group | Kailix International | Tom Joy Advisors SAC Capital Advisors, LP The NIR Group LLC | SageCrest LLC Alternative Investments Sageview Capital LLC Hedge Fund Notes Sandell Asset Management The Spanish River Group Corporation Threadneedle Asset Salida Capital | Hedge Fund Management | Hedge Notes Fund Notes Satellite Asset Management Tontine Associates Sciens Capital Management TPG-Axon Capital LP Trafelet & Co. Sellers Capital Traxis Partners LP Sloan Robinson Tremblant Capital Group | Sparx Group Co. Ltd Bret Barakett SRM Global Tudor Capital Steelhead Partners LP Vallea Capital Sugarloaf Rock Capital Veritas Asset Management System Absolute Return Viresco International Capital (SAR) Management T2 Capital Partners Viking Global Investors Tai Tam Capital Vision Capital Tantallon Capital York Capital Temujin Global Asset Management Fund of Hedge Fund Tracker Profiles Eucalyptus Investment Funds

Prime Brokerage Business | Wikipedia
Quick Link: Hedge Fund Prime Brokers Prime brokerage is the generic name for a bundled package of services offered by investment banks and
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 28

The Prime Brokerage Book

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,
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 29

The Prime Brokerage Book

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. History The basic services offered by a prime broker give a money manager the ability to trade with multiple brokerage houses while maintaining, in a centralized master account at their prime broker, all of the hedge fund‘s cash and securities. Additionally, the prime broker offers stock loan services, portfolio reporting, consolidated cash management and other services. Fundamentally, the advent of the Prime Broker freed the money manager from the more time consuming and expensive aspects of running a fund. These services worked because they also allowed the money manager to maintain relationships with multiple brokerage houses for IPO allocations, research, best execution, conference access and other products. The concept and term "prime brokerage" is generally attributed to the U.S. broker-dealer Furman Selz in the late 1970s. However, the first hedge fund operation is attributed to Alfred Winslow Jones in 1949. In the pre-prime brokerage marketplace, portfolio management was a significant challenge; money managers had to keep track of all of their own trades, consolidate their positions and calculate their performance regardless of which brokerage firms executed those trades or maintained those positions. The concept was immediately seen to be successful, and was quickly copied by the dominant bulge bracket brokerage firms such as Morgan Stanley, Bear Stearns, Merrill Lynch, Lehman Brothers, and Goldman Sachs. At this nascent stage, hedge funds were much smaller than they are today and were mostly U.S. domestic long-short equities funds. The first non-U.S. prime brokerage business was created by Merrill Lynch's London office in the late 1980s. Through the 1980s and 1990s, prime brokerage was largely an equities-based product, although various prime brokers did supplement their core equities capabilities with basic bond clearing and custody. In addition, prime brokers supplemented their
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 30

The Prime Brokerage Book

operational function by providing portfolio reporting; initially by messenger, then by fax and today over the web. Over the years, prime brokers have expanded their product and service offerings to include some or all of the full range of fixed income and derivative products, as well as foreign exchange and futures products. As hedge funds have proliferated globally through the 1990s and the current decade, prime brokerage has become an increasingly competitive field and an important contributor to the overall profitability of the investment banking business. As of 2006, the most successful investment banks each report over two billion dollars in annual revenue directly attributed to their prime brokerage operations (source: 2006 annual reports of Morgan Stanley and Goldman Sachs). Fees Prime brokers do not charge a fee for the bundled package of services they provide to hedge funds. Rather, revenues are typically derived from three sources: spreads on financing (including stock loan), trading commissions and fees for the settlement of transactions done away from the prime broker. The financing and lending spreads, which are charged in basis points on the value of client loans (debit balances), client deposits (credit balances), client short sales (short balances), and synthetic financing products such as swaps and CFDs (Contract for difference), make up the vast majority of prime brokerage revenue. Therefore, clients who undertake substantial short-selling or leverage represent more lucrative opportunity than clients who do relatively less short selling and/or utilize minimal leverage. Clients whose market activities are principally fixed income oriented will generally produce less prime brokerage revenue, but may still present significant economic opportunity in the repo, foreign exchange (fx), futures, and flow business areas of the investment bank. Risks Prime Brokers facilitate hedge fund leverage, primarily through loans secured by the long positions of their clients. In this regard, the Prime Broker is exposed to the risk of loss in the event that the value of collateral held as security declines below the loan value, and the client is unable to repay the deficit. In practice, such conditions arise
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 31

The Prime Brokerage Book

only in the case of extraordinary volatility or unexpected correlation reversions and are exceedingly rare. Other forms of risk inherent in Prime Brokerage include operational risk and reputational risk. Large prime brokerage firms today typically monitor the risk within client portfolios by either Value at Risk (VaR) or "Rules Based" stress testing. Stress testing entails running a series of what-if scenarios that identify the potential gains or losses for each position due to adverse market events. Examples of stress test scenarios include: * Flight to Quality * 1% up or down parallel movement in 10-year treasury yield curve Retrieved from Wikipedia

Prime Brokerage News
Large Banks Win Business (PrimeBrokerageGuide.com) Recently hedge funds have been moving some assets away from investment banks which specialize in providing a relatively narrow number of products to broader diversified banks which are more secure in earn money in hundreds of different ways. These larger banks often make money by catering to both institutional and retail clients and are less likely to fail. Some of these firms to recently benefit have been BNP Paribas, Fidelity, Credit Suisse, and Deutsche Bank (view our list of prime brokers on the right hand side of PrimeBrokerageGuide.com). As counterparty risk management and multi-prime brokerage both grow in popularity this trend will only increase. The list of top prime brokers by the end of 2009 could look very different than it did just this last year. Here is a recent article on this topic:
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 32

The Prime Brokerage Book

Broker-dealers such as Morgan Stanley and Goldman Sachs are losing out in the battle for hedge funds' dwindling pool of assets, as funds seek out banks with diverse sources of funding in a major shake-up of prime broking. The collapse of investment bank Lehman Brothers (LEHMQ.PK) in September shocked hedge funds, as those with accounts at Lehman when it sought bankruptcy protection had those assets frozen and risked being unable to close trades. "The Lehman bankruptcy ... led many hedge funds to flee the two largest prime brokers, Morgan Stanley and Goldman, for the perceived safety of the universal banks," said Berstein Research analyst Brad Hintz in a note. Prime brokers make money by charging hedge funds fees for providing financing for trading and settlement of trades. Credit Suisse (CSGN.VX), whose operations include a large wealth management unit as well as prime broking, saw balances in its prime brokerage unit grow 50-60 percent last year compared with 2007, a source familiar with the business said. Roy Martins, the bank's head of international prime services, said: "There was a peak in terms of business in September and October. All the clients we took on had existing relationships and dialogues with us as they were clients we had been targeting anyway." Deutsche Bank (DBKGn.DE), backed up by its big retail bank, has also benefited from an influx of business in its prime brokerage in the last six months, a source close to the bank said. source

Counterparty Risk Management | Counter Party Risk
It goes without saying that counterparty risk management has become more important to look at for just about everyone in the industry. What needs more
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 33

The Prime Brokerage Book

discussion is exactly how to conduct and assess counterparty risks. Here is an article on this topic: Risk and Reward: Hedge Funds Changing Views on Counterparty Relationships, focuses on the heightened importance of effectively managing counterparty risk and the integral role it plays in partnering with a prime broker. It also highlights best practices that have been implemented by other hedge funds to help address and mitigate counterparty risk. Key findings from the study include: • Hedge Funds Increase Scrutiny On Managing Counterparty Risk -Counterparty risk monitoring has become a significant part of overall business operations. One of the major drivers for heightened attention to managing counterparty risk are hedge funds' concerns about the negative impact it could ultimately have on their firms' operations should one of their key counterparties default on their obligations. More than 50% of respondents reported monitoring counterparty risk on a daily basis and nearly 85% consider it an extremely important or very important business issue. An overwhelming 96% of respondents also cited managing counterparty risk as the number one factor in selecting their prime broker relationships. Concerns about managing counterparty risk two years ago were not a primary issue for most hedge funds, as 26% of the respondents considered counterparty risk important and 22% viewed it as moderately important; • Counterparty Risk Management Must be Tackled Directly and Systematically -- Effectively monitoring counterparty risk will continue to be a critical component of a hedge fund's business operations. The development of a standardized, well-documented approach to analyzing counterparty risk remains one of the top priorities for the hedge fund community. Best practices for proactively managing counterparty risk include: * Leveraging innovative services from prime brokers, such as a triparty account approach * Conducting consistent internal portfolio and risk assessments * Formalizing business processes by outsourcing and installing inPrimeBrokerageGuide.com PrimebrokerageAssociation.org 34

The Prime Brokerage Book

house technology solutions such as portfolio management systems * Implementing third-party independent valuation technology solutions and service providers supplemented with in-house valuation tools; and • Adoption of Technology -- There is no silver bullet for hedge funds when attempting to actively monitor the balance sheets of important counterparties despite the growing concerns over counterparty risk management. Read the full article

Top 3 Technology Trends for Hedge Funds in 2009
Below is a short guest post by Peter Curley of Nirvana Solutions: The turmoil that hedge funds have experienced in the last few months will ultimately have a significant impact on the technology and the infrastructure supporting this industry. The trends we will witness in 2009 will primarily be the result of the following drivers:  Increased cost consciousness - This will be true for both new and more established funds.  The new requirements of the next generation of hedge funds These funds will be smaller, more opportunistic, and less likely to focus on any one strategy or asset class.  Market volatility - All indications are that 2009 will continue to be as volatile as the latter half of 2008. Three technology trends for 2009: 1 – Outsourcing – Historically hedge funds have resisted efforts to outsource. Funds preferred to build out their own middle- and backoffice functions citing concerns around flexibility and privacy. Now, for many funds, the need to aggressively cut costs will trump these
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 35

The Prime Brokerage Book

concerns and force outsourcing. Interestingly, taking a step back we can see that there has always existed incredible duplication of effort across the hedge fund eco-system. In many cases hedge funds, prime brokers, and fund admins, all conduct the same processes using the same legacy "T+1" portfolio management systems. The industry can no longer support this duplication. All hedge funds, except the very largest, will begin to look to third-parties to offload this operational burden. 2 – Restructuring of the industry's service providers. The biggest news here will be rise of the mini-primes. The leading primes can no longer be profitable in this new world of multi-custodial relationships. With the demise of the captive single prime model we are now seeing the top-tier primes retreat up-market to focus their efforts on servicing funds with greater than $1 billion under management. This leaves the lower-cost-structure mini-primes ideally positioned to fill the void. The new mini-prime offering is still evolving but will likely offer a complete multi-prime brokerage service platform that in some cases will also include hedge fund administration. These all-in-one multi-prime service platforms will be especially critical to the regeneration of our industry because they will act as the entry point for 100's of the new spin-off funds that are expected to form in 2009. 3 – Real-Time systems – In this new world of opportunistic alpha, hedge fund managers can no longer afford to rely on systems that offer "T+1" reporting. As noted earlier, legacy technology that can only offer this type of end-of-day and end-of-month reporting will become less relevant and ultimately be outsourced to third-parties. Hedge fund's instead will focus their resources on real-time systems that can aggregate risk and return across multiple prime relationships and multiple asset classes. Increasingly we will see the desktop of a hedge fund trader/portfolio manager feature only 2 types of real-time FIX based systems: 1/ Those connected to implementing the investment decision (i.e. execution management systems), and 2/ systems, that once an investment decision has been implemented, can offer a real-time understanding of risk and return (i.e. real-time portfolio management systems and risk management systems).

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

36

The Prime Brokerage Book

Article contributed by Peter Curley of Nirvana Solutions. Founded in 2006, Nirvana Solutions is a San Francisco based software company that provides real-time portfolio management solutions to multi-prime hedge funds and prime brokers.

Adding a Second Prime Broker
While looking for a client document online I found a white paper on prime brokerage which discusses the use of multi prime brokerage firms by a single hedge fund. This white paper claims that the benefits of adding a second prime broker include:  Mitigation of risk: counterparty, financing, liquidity and operational  An additional source of alpha-generating trade ideas, capital introductions, etc.  Ensure optimal financing through competitive pricing of margin lending and stock loan  Gain access to competitive or innovative cross-margining policies of the competing prime broker  Leverage across the relative strengths of service providers in synthetic financing, swap trading or market access  Catalyst for reduced dependency on outside service providers, giving greater direct operational control This full white paper may be read here.

Bernard Madoff
Not a Hedge Fund | No Prime Brokerage Services Just came across another post on the Madoff
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 37

The Prime Brokerage Book

fraud case. This article is by Veryan Allen, here is an excerpt: Bernie Madoff was a stock broker "managing" client accounts. He was never part of the hedge fund industry. His firm was "regulated" and fraud is already illegal. He did not charge 2 and 20 and had no prime broker, proper auditor or independent administrator. Few professional investors invested directly with so many red flags in abundance. Due diligence is an alpha source itself. And portfolio diversification with NUMEROUS strategies and managers is mandatory. read more...

Prime Brokerage Risk
Prime Brokerage Risk | Risks of Single Priming Below is a short excerpt from an article I found on why hedge funds are now working with multiple prime brokers at one time. I believe this model will become even more important in 2009 and possibly become a required checkbox for investments from many institutional investors or a green light from institutional consultants. Why It's Important: With the demise of Bear Stearns in March 2008 and the bankruptcy of Lehman Brothers this past September, hedge funds that had prime brokerage relationships with these firms were exposed to significant counterparty risk. Some hedge funds that primed with Lehman had their assets frozen as part of the European bankruptcy proceedings against Lehman, driving some to liquidate securities to meet redemption calls from investors and even forcing some out of business. "There are people who either had long assets on deposit and can't get them back or, worse, Lehman borrowed the assets and lent them out," explains Larry Tabb, founder and CEO of TABB Group. Where the Industry Is Now: Most hedge funds with more than $250 million in assets have relationships with two to four primes, which are
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 38

The Prime Brokerage Book

picked for their trading expertise in certain asset classes (e.g., FX or derivatives) or geographies, such as Europe or Asia. For smaller hedge funds, however, diversifying can be difficult because the large prime brokers have minimum-asset requirements and other constraints to weed out the smaller players. Smaller hedge funds, with $10 to $15 million in AUM, typically launch with a single prime broker that may provide trading systems, margin accounts, stock loans and clearing. source

Prime Brokerage Agreement | Contract Example
While looking for a white paper on prime brokerage I stumbled upon an example prime brokerage services contract. If you are conducting due diligence on prime brokers or about to sign a contract with one it may make sense to look at this example contract just to get a sense of what to expect or negotiate. To view the example prime brokerage agreement please click here.

New Prime Brokerage Model Emerging
The credit crisis and the subject of counter party risk is proving to be the f final nail in the coffin for the hedge fund industry's single prime brokerage model. Funds of all sizes now demand multiple custodial relationships. The problem the high-cost-structure leading prime brokerage firms now face is that without the assurance of the captive single prime model the economics of servicing smaller funds no longer makes sense. This reality combined with the primes' decreased risk tolerance means that we are seeing a mass exodus away from the top-tier primes. Anecdotal evidence suggests that these primes are now in the process of weeding out clients that manage less than $100
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 39

The Prime Brokerage Book

million or that do not generate annual revenues of at least $250,000. We are also witnessing primes becoming more selective about what type of funds they are willing to service. Funds whose strategies involve less liquid securities and/or high leverage are now finding the bar set much higher. This retrenchment by the leading prime brokers raises the obvious questions - Who will fill the void and offer prime services to the lower end of the market? Who will provide the financing, stock loan, technology infrastructure etc. necessary for smaller funds to generate alpha? Before we answer this question let‘s take a moment to think about why this smaller hedge fund segment is so key to the future success of the industry. It is no secret that size kills alpha. Many successful funds follow a familiar arc. They gain attention (and funds) by earning outsized returns, as they grow in size their primary strategy reaches capacity and they experience a leveling off of returns. If they are not lucky enough to find another successful strategy, returns will continue to suffer, capital will begin to flow out and ultimately investment talent will go in search of new opportunities. This regeneration process is vital to the health of the industry and for many investors, it is the promise of catching a smaller fund during this growth phase that motivates them to invest. 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. Interestingly we are also seeing a number of new entrants to this expanded segment of the prime brokerage industry. These are for the most part more traditional brokers who see an opportunity to increase the stickiness of their execution services, as well to develop new revenue streams, by building out a prime brokerage offering.
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 40

The Prime Brokerage Book

Only time will tell who will be successful in this greatly altered landscape of prime brokerage. The winners will be the firms that understand that the new economics of prime brokerage demand a new industry infrastructure. This prime infrastructure will rely heavily on cost-effective technologies that can offer aggregated multi-prime reporting, as well as real-time views of critical data such as P&L and Risk, right to the desktop of the hedge fund. This restructuring of the prime model will ensure the health of the industry by continuing to offer a relatively low barrier of entry to the all important small hedge fund segment. Article contributed by Peter Curley of Nirvana Solutions

Gating Clauses & Lock Up Periods for Investors
Hedge Fund Research's Global Hedge Fund Index was down 3.04 percent in November, after a drop of 9.26 percent in October (see FIN Alternatives article). That brings the index down 22.3% YTD through November. Continued poor performance has increased redemption requests, causing an increasing number of hedge funds to block investors from redeeming shares (see NY Times article). The increased addition of illiquid investments over the years (such as real estate and private equity) has caused many funds to start considering a new model that would require longer lock-up times for lower fees. High-water marks, which would force some under-performing funds to earn back 25 percent or more before taking profit fees, will cause additional funds to close, although others insist they will take the high road and not close until they are profitable again. As of the end of last week, approximately 100 hedge funds have placed restrictions on withdraws, in what is becoming a financial roach motel where investors can check in, but they cannot check out (see Bloomberg article). The increased use of gates has even spread to some of the previous stars of the industry, such as Fortress
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 41

The Prime Brokerage Book

Investment Group, Tudor Investment Corp., and D.E. Shaw & Company (see WSJ article). Furthermore, the problems are even worse for those funds investing in emerging markets, which continue to under-perform and are down an additional 1.41% on average in November (see Bloomberg article). Finally, even with new gating restrictions, some hedge funds are also being forced to renegotiate borrowing terms with their prime brokerage lenders as losses and redemption requests increase (see Financial Times article). Many prime brokers are also seeing this as an opportunity to drop clients or renegotiate terms that were originally in favor of the large hedge funds who previously had bargaining power. No doubt many large investors with liquidity will be able to throw their weight around in a similar way as they begin renegotiating lower fee structures in return for longer lockup periods. by Davide Enke

Top 3 Prime Brokerage Trends
Over the last two years the mainstream media‘s and general public‘s interest in prime brokerage has rapidly grown. This is due to a number of factors including the struggle and failure many investment banks offering prime brokerage services including Lehman Brothers, mergers within the industry and widespread failures and redemption notices of hedge funds themselves. The top three trends affecting the prime brokerage industry right now are multi-prime brokerage relationships, limiting capital introduction services, and prime brokers acting as business partners to hedge fund managers. Multi-prime brokerage relationships used to be used by $5B+ hedge funds whose large institutional clients demanded the practice as a risk management technique. In the past this was almost though of as unnecessary as no large investment banks offering prime services
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 42

The Prime Brokerage Book

had collapsed. It was seen in the same light as a major economic superpower defaulting on their own investment notes. This year, in 2008 everything has changed, Lehman failed and many investment banks have struggled or sold off their prime brokerage services to other firms. This has lead to widespread migrations between prime brokerage service providers and a trend towards managing multiprime brokerage relationships for funds with over $500M in assets or even lower. Some firms as small as $5M are choosing to work with more than one prime brokerage firm from the very start as a few firms have reported shutting down due to assets being locked up within Lehman Brothers when they collapsed earlier this year. Another shift in the industry has been felt within the area of capital introduction services. Anyone offering these services lately has faced increased challenges of investors sitting on cash, poor market and overall industry performance along with increasingly frequent reports of hedge fund fraud. Prime brokerage firms are no effected by this, especially since they often take on and attempt to service more clients than most independent hedge fund marketers which are often referred to as third party marketers would. This had led to more selective capital introduction service offerings by prime brokerage firms and more frequent partnerships between prime brokerage firms and third party marketers in the industry. The third major trend affecting the prime brokerage business is that more firms in the space are positioning themselves as business partners. This is due to the commoditized nature of the industry and high level of competition for new business. Prime brokerage firms are now publishing white papers, offering business plan and marketing plan startup tools and holding workshops and networking events to help hedge fund managers connect with additional business partners an. investors

Prime Broker List
Nowadays this list seems to be changing daily - but here is a

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

43

The Prime Brokerage Book

relatively recent list containing the names of over 190 prime brokerage firms: Goldman, Sachs & Co. Fortis Clearing Americas LLC Goldman Sachs Execution & Clearing, L.P. Sanford C. Bernstein & Co. LLC Morgan Stanley & Co. Incorporated Interactive Brokers L.L.C. Jefferies & Company, Inc. Dundee Securities Corporation Natixis Bleichroeder, Inc. RBC Capital Markets Corporation Ferris, Baker Watts, Inc. BMO Capital Markets Corporation Morgan Stanley & Co. Incorporated Legent Clearing LLC Prime Dealer Services Corp. J.P. Morgan Securities Inc. Prudential Bache Commodities, LLC Barclays Capital Inc. LPL Financial Corporation National Bank Financial Inc. Barclays Capital Inc. Deutsche Bank Securities Inc. Lek Securities Corporation ITG, Inc. Wedbush Morgan Securities, Inc. Prudential Bache Securities, LLC Penson Financial Services, Inc. Merrill Lynch Professional Clearing Corp. MF Global Inc. Ingalls & Snyder L.L.C. Banca IMI Securities Corporation First Clearing, LLC Neuberger Berman, L.L.C. Neuberger Berman, L.L.C. Ridge Clearing & Outsourcing Solutions, Inc.
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 44

The Prime Brokerage Book

Merrill Lynch Pierce Fenner & Smith Inc. Charles Schwab & Co., Inc. Nomura Securities International Inc. Scotia Capital Inc. RBC Dominion Securities Inc. Wachovia Securities, LLC Goldman Sachs Execution & Clearing, L.P. Gelber Group LLC BMO Nesbitt Burns, Inc. American Enterprise Investment Services, Inc. UBS Financial Services Inc. National Financial Services LLC Lek Securities Corporation BNP Paribas Prime Brokerage, Inc. Compass Professional Services, LLC Penson Financial Services, Inc. RBC Capital Markets Corporation SMW Trading Company, Inc. Barclays Capital Inc. Greenwich Capital Markets, Inc. Maple Securities U.S.A. Inc. ING Financial Markets LLC TradeStation Securities, Inc. Southwest Securities, Inc. Albert Fried & Company, LLC SG Americas Securities, LLC J.P. Morgan Clearing Corp. Credit Suisse Securities (USA) LLC MF Global Inc. NYFIX Securities Corporation Merrill Lynch Pierce Fenner & Smith Inc. Lazard Capital Markets LLC First Southwest Company Bank of America Securities, LLC Piper Jaffray & Co. Bank of America Securities, LLC Goldman Sachs Execution & Clearing, L.P. Electronic Brokerage Systems, LLC.
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 45

The Prime Brokerage Book

optionsXpress, Inc. Octeg, LLC J.P. Morgan Clearing Corp. Credit Suisse Securities (USA) LLC Terra Nova Financial, LLC USAA Investment Management Company Tradition Asiel Securities Inc. Janney Montgomery Scott L.L.C. BNP Paribas Securities Corp. E*TRADE Clearing LLC Tradelink L.L.C. Fortis Clearing Americas LLC CGMI Citigroup Global Markets Inc. Stephens Inc. ABN AMRO Inc. Automated Trading Desk Financial Services, LLC Newedge USA, LLC MF Global Inc. Archipelago Securities, L.L.C. CIBC World Markets Corp. Assent LLC Pershing LLC StockCross Financial Services, Inc. UBS Securities LLC MF Global Inc. Newedge USA, LLC MS Securities Services Inc. Goldman, Sachs & Co. Goldman Sachs Execution & Clearing, L.P. CIBC World Markets Inc. Vision Financial Markets LLC Lek Securities Corporation Penson Financial Services, Inc. Ziv Investment Company Merrill Lynch Professional Clearing Corp. Nasdaq Option Services, LLC Paloma Securities, L.L.C.
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 46

The Prime Brokerage Book

Interactive Brokers L.L.C. Merrill Lynch Professional Clearing Corp. Fortis Clearing Americas LLC Robert W. Baird & Co. Incorporated Timber Hill L.L.C. Merrill Lynch Professional Clearing Corp. Merrill Lynch Professional Clearing Corp. Fortis Clearing Americas LLC Oppenheimer & Co. Inc. Goldman Sachs Execution & Clearing, L.P. Deutsche Bank Securities Inc. Merrill Lynch Professional Clearing Corp. Barclays Capital Inc. LiquidPoint, LLC KDC Merger Arbitrage Fund, LP Vision Financial Markets LLC Tradelink L.L.C. Merrill Lynch Professional Clearing Corp. / Merrill Lynch Futures Morgan Stanley & Co. Incorporated Electronic Brokerage Systems, LLC. Newedge USA, LLC Merrill Lynch Pierce Fenner & Smith/Broker Dealer Execution Services Timber Hill L.L.C. TD Waterhourse Canada Inc. UBS Securities LLC UBS Securities LLC Interactive Brokers L.L.C. Bernard L. Madoff Investment Securities LLC Daiwa Securities America, Inc. Calyon Securities (USA) Inc. BNP Paribas Securities Corp. Newedge USA, LLC J.P. Morgan Futures Inc. Merrill Lynch Professional Clearing Corp. Newedge USA, LLC Merrill Lynch Professional Clearing Corp. Lakeshore Securities, L.P.
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 47

The Prime Brokerage Book

Merrill Lynch Pierce Fenner & Smith/Broker Dealer Execution Services Goldman Sachs Execution & Clearing, L.P. Fortis Clearing Americas LLC Cantor Fitzgerald & Co. Clearview Correspondent Services, LLC Scottrade, Inc. Newedge USA, LLC Fortis Securities, LLC Newedge USA, LLC Raymond James & Associates, Inc. Mesirow Financial Inc. Fortis Clearing Americas LLC Wells Fargo Investments, LLC Goldman Sachs Execution & Clearing, L.P. Citigroup Global Markets Inc. EWT, LLC H&R Block Financial Advisors, Inc. Newedge USA, LLC J.J.B. Hilliard, W.L. Lyons, LLC William Blair & Company, L.L.C. Bank of America Securities, LLC Citadel Trading Group L.L.C. TD Ameritrade Clearing, Inc. Morgan, Keegan & Company, Inc. Merrill Lynch Professional Clearing Corp. Merrill Lynch Pierce Fenner & Smith/Broker Dealer Execution Services Stifel Nicolaus & Company Incorporated RBC Capital Markets Corporation Fortis Clearing Americas LLC HSBC Securities (USA) Inc. J.P. Morgan Clearing Corp. Goldman Sachs Execution & Clearing, L.P. Fortis Clearing Americas LLC OCC/ICE CLEAR Cross Margin J.P. Morgan Clearing Corp. Goldman Sachs Execution & Clearing, L.P. Goldman Sachs Execution & Clearing, L.P.
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 48

The Prime Brokerage Book

Merrill Lynch Professional Clearing Corp. Chicago Mercantile Exchange Goldman Sachs Execution & Clearing, L.P. Bank of America Securities, LLC Nomura Securities International Inc.

Prime Brokerage Lawsuits
Hedge Fund Lawsuit | Legal Actions (http://HedgeFundBlogger.com) Perhaps more dangerous than a wave of further redemptions in the hedge fund industry would be a wave of legal actions. With gates dropping as fast as assets at many hedge funds investors may be often left with locked-up assets, partial withdrawals, steep losses or all three. The last thing the industry needs is wave of 500+ lawsuits against hundreds of the top managers in the industry. Most hedge funds are relatively short on staff as it is and legal battles can keep managers from trading and raising capital as they should. Here is a story excerpt about Amaranth and their lawsuit against JP Morgan and their prime brokerage division: Remember the days when a hedge fund losing billions was news? Wise men would knot up their brows and wonder if hedge funds weren’t too loosely regulated or were creating some kind of systemic risk. After what we’ve been through in the past year that all seems like the good old days. We were reminded of this today when we discovered that Amaranth’s lawsuit against JP Morgan Chase was still going on. It seems like a
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 49

The Prime Brokerage Book

lifetime ago that the fund run by Nick Maounis imploded amid bad bets on natural gas. It was the trade that made Brian Hunter, Amaranth’s lead energy trader, famous. Amaranth lost $6 billion, collapsed, and sold its assets to JP Morgan and Citadel. Afterwards, there were recriminations in all directions. Hunter is said to blame Maounis for not having the available cash to cover the margin calls. Maounis, for his part, felt he was done in by nefarious deeds at his prime broker, JP Morgan. Those feelings because a lawsuit, of course. Read more...

Prime Brokerage Regulation
Are New Regulations Possible? (http://PrimeBrokerageGuide.com) Below is a article from All About Alpha regarding pending regulations on the hedge fund industry and how they may target prime brokerage firms. From a cost perspective this may make sense since this is a central point of potential risk control, but I would be surprised if regulators gone down this road. I believe regulations will stay at the security level and then target banks more directly than hedge fund managers. While the average hedge fund is small and uses a very small amount of leverage, the average dollar invested in a hedge fund is managed by a large manager who regularly uses leverage. This state of affairs is courtesy of the significant amount of concentration in the hedge fund industry. Most of the world‘s hedge fund assets are managed by a small group of mega-managers who can shop their business around to various prime brokers in order to extract the best deal. A new paper says that in an effort to win this business, prime brokers have been falling over themselves to offer the most leverage and the best terms. Ergo, it is the prime brokers, not the hedge funds themselves that require stricter regulation. (Think: regulating mortgage brokers, not home-owners…)
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 50

The Prime Brokerage Book

By doing so, regulators can also get the prime brokers to do some of their bidding when it comes to hedge fund oversight. In other words, they‘d essentially be informally deputizing the prime brokers. The paper was written by Michael King of the Bank for International Settlements and Philipp Maier of the Bank of Canada. (Note to PR departments of these organizations: Relax, the author says, ―no responsibility should be attributed to the Bank for International Settlements or the Bank of Canada―.) Read more...

Saratoga Prime Services Pulse Trading
New York, NY, – Saratoga Prime Services, a division of Saratoga Capital, LLC, has formed an alliance with Pulse Trading, Inc. that will give Saratoga Prime‘s hedge fund clients access to Pulse‘s dark pool, agency desk and investment research services in return for Saratoga Prime‘s trading, clearing, custody, technology and administration facilities. Saratoga Capital of New York and Pulse Trading of Boston are both institutional agency brokerage firms. Saratoga Prime specializes in providing trading-related services to start-up and mid-sized hedge funds. Under the joint agreement, Saratoga Prime‘s clients will gain access to Pulse Trading‘s BlockCross dark pool and the firm‘s institutional trading desk, together with its Investment Research Consortium of ―best of breed‖ independent securities analysis and commission management service. Pulse‘s clients will be able to tap into the brokerage services of Saratoga Prime, and the clearing and custody services of Goldman Sachs Execution and Clearing (GSEC), JP Morgan, and Interactive Brokers.

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

51

The Prime Brokerage Book

―We believe strongly that this reciprocal agreement between Saratoga Prime and Pulse Trading will be of immense benefit to our respective clients,‖ commented Saratoga Prime managing partner Lance Baraker. Added Kevin Carroll, Pulse Trading managing partner, ―We are very pleased to introduce our leading-edge block trading and independent research services to Saratoga Prime and its clients.‖ Baraker also disclosed that Saratoga Prime has expanded its Prime offering in Dallas, TX, and San Francisco, CA. Todd McFarland, formerly with Citigroup Lava Trading and AFA (Advanced Financial Applications) recently joined Pulse‘s San Francisco office and is responsible for Saratoga‘s West Coast business. New York-based Saratoga Prime also has a regional office in Boston, MA.

Prime Brokerage Firms Pressuring Managers
Adding to the challenges of trying to improve the performance of their funds hedge fund managers are now facing additional pressure from their prime brokers. While some funds will simply end up paying more or having to sell off some assets to meet capital requirements others will simply shop around more...further increasing the rate at which hedge funds change primary prime brokers or multi-prime with an assortment of prime brokerage firms at one time. Here is a short article on this topic: The survival of a raft of hedge funds is being threatened by fresh pressure to stump up more collateral for trades made in a range of illiquid assets. So-called prime brokers, who provide a range of services to hedge funds, are imposing tougher conditions on their clients and charging more for financing following the collapse of Lehman Brothers in mid-September, raising fears that more funds face collapse. The more conservative terms mean that a hedge fund would have to put up extra collateral against financing if markets fall further or sell
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 52

The Prime Brokerage Book

down its holdings. The problem for many hedge funds is that they have already sold down their more liquid investments and are grappling with a wave of redemptions from their own investors. Further collateral requests or higher financing costs may push many hedge funds over the edge. One hedge fund manager said: "Funding is being withdrawn by prime brokers and funding rates have risen sharply in the past week or two. A tough environment is just getting tougher." Industry managers are concerned that renewed market turmoil, leading to weaker performance and client redemptions, could lead to a vicious circle of selling by hedge funds. One prime broker said the situation was "on a knife edge". "Everyone needs to keep their nerve," he added. He also said that prime brokers were particularly targeting funds that specialize in emerging markets, both in equities and fixed income, as well as in credit and convertible bonds - instruments that can -convert into ordinary shares. Source

Switching Prime Brokerage Firms
(http://PrimeBrokerageGuide.com) Lately you might have noticed an ongoing "battle of the press releases" in the media by many prime brokerage firms. These are typically written so that the firm is positioned as being safe, technologically advanced or recently swamped with new business. This is because these firms know that many decisions are being made each day right now by hedge fund managers regarding where to prime. More funds than ever before are now deciding to multi-prime or switch prime brokers altogether. Here is a reason excerpt and quote from someone at UBS speaking to this point:

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

53

The Prime Brokerage Book

Across Wall Street, hundreds of investment funds that relied on broker-dealers established accounts with commercial banks boasting stronger credit. The moves have shaken up a business long dominated by Morgan Stanley, Goldman Sachs Group Inc and Bear Stearns. "It's a $2 trillion business and in normal market conditions, people kill themselves to move 1 percent of market share. In recent weeks, probably 35 to 40 percent of global market share has been redistributed," said Alex Ehrlich, global head of prime services at UBS. "Never has there been a more disruptive period."

Financial Clearing and Execution Services
Clearing is one of the most basic services provided by a prime broker. Loader (2002) gives an in-depth analysis for the clearing and settlement services in the general financial markets. When a prime broker is hired to carry out clearing, he performs back office functions on behalf of the hedge fund client with the broker-dealer that executed the trade. When the hedge fund begins the trade, the fund provides the executing broker with the prime broker's name and the relevant account with the prime broker. Respectively, the executing broker gives-up the trade (meaning, passing the trade information) to the prime broker, and the hedge fund reports the allocations of the trade to the prime broke. The prime broker then performs a post-trade matching, confirms the trade with both sides if the trade details match. Otherwise, the prime broker works with the hedge fund and the executing broker to resolve the differences. For the hedge fund, the choice of the executing broker includes but is not limited to the trading desk of the prime broker. (A broker-dealer must maintain a "Chinese Wall" between the prime brokerage operation and the trading desk.) If a prime broker acts as principal in the give-up process, the prime broker allows the hedge fund to trade under the prime broker's name and assumes the role of the hedge
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 54

The Prime Brokerage Book

fund with respect to the executing broker. On the other hand, the prime broker plays the role of the executing broker with respect to the hedge fund, for all future cash flows associated with the trade. The prime broker could also act as agent, in which case the prime broker clears and settles the trade on behalf of the hedge fund but does not assume counterparty risk. Principal prime brokerage is most common in the foreign exchange, OTC derivative and credit markets. Exchange or cash traded securities are usually cleared on an agency basis. In 2008, the financial crisis has proven the need for the multi-prime brokerage model. According to Sameer Shalaby, CEO of Paladyne Systems, "(hedge fund) firms should consider that establishing relationships with multiple prime brokers can spread the risk that their assets will be in jeopardy if another crisis arises." (full article) The process for a hedge fund to clear through multiple prime brokerage firms has been made easy, thanks to the available technologies. In as early as 2003, three leading foreign-exchange prime brokers - Deutsche Bank, JP Morgan Chase and AIG Trading have casted aside competitive differences and teamed up to create an online service for automating the "give-up" trade process, "to help (executing brokers) give up their transactions electronically not just to one prime broker but to all (of their) prime brokers"(more). Ron Suber, head of global sales and marketing and a senior partner at Merlin Securities, explains in an article dated Oct 2008 that Merlin's technology allows funds to aggregate data from different prime brokers on one system. "That has led to Merlin picking up dramatic new business given its multi-prime services." By Yifei Huang Sources: Hedge Funds and Prime Brokers; Fixed Income Prime Brokerage: Agency Model

Prime Brokerage Flows
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 55

The Prime Brokerage Book

Industry Changes Here is a short excerpt from Dealbook on the recent dramatic changes in the industry which have been reshaping the competitive landscape of this space: The prime brokerage landscape seems to be changing amid the shake-up on Wall Street, according to Investment Dealers‘ Digest. Two major prime brokers — Bear Stearns and Lehman Brothers — are gone, while two more — Morgan Stanley and Goldman Sachs — have had hundreds of clients pull their money out of their prime brokerage units. The result has been a boom for rivals like Deutsche Bank and Credit Suisse, as well as independent prime brokers, which have all fought for years to lure prime brokerage clients away from their big rivals. The prime brokerage units inside the big investment banks provide financing, clearing and settlement services for hedge funds, as well as for other investors. These units hold on to billions of dollars of their investors‘ cash and help execute their trading strategy. But the demise of Lehman Brothers last month shook up this lucrative business. Several hedge funds that had counted on Lehman‘s prime brokerage unit were stunned to find out that their collateral was frozen and that they could not get access to their money to make trades. Some that depended on Lehman as their sole prime broker remain paralyzed. Read more...

Stock Market Trading Volume
There was an article out today in the FT about low stock market trading volume. I have heard this directly from prime brokerage firms, I've also heard that managers are holding more cash than usual,
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 56

The Prime Brokerage Book

taking more cautious trading positions than usual. The exception to this seem to be those few funds which thrive during this type of market volatility, but as the index figures which published this morning show - most funds are working within negative territory for 2008. Here is the story: Some of the steepest sell-offs and gains witnessed in an especially volatile few weeks for Wall Street could have been exacerbated by relatively low trading volumes as frightened hedge funds sat on the sidelines. This decoupling of volume and volatility in equity markets is just another example of the reluctance of traders to speculate against a backdrop of uncertainty over the global banking system and economy, say analysts. On October 15, for example, when the S&P 500, Wall Street‘s benchmark equity index, dropped 9.9 per cent, its largest one-day drop in more than 60 years, volume was only 11.5bn shares. This was the third lowest volume day that month, with only October 1 and 2, when the ban on short-selling financials was still in effect, having lower trading levels. Indeed volume was only 58 per cent of the record reported on October 10 when the S&P 500 fell just 1.2 per cent. Source

Asian Fund Leverage & Prime Brokerage
It seems that many Asian-based hedge funds have dodged a few bullets by not being tied as closely to Bear or Lehman... that combined with traditionally using less leverage than some other funds might have helped a few Asian hedge funds weather this storm. By a few I mean very few - recent data suggests that Asian funds are down more than their peers over the last few months. Below is an excerpt on how some Asian funds have dodged the prime brokerage woes of US and UK based groups:

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

57

The Prime Brokerage Book

ASIAN hedge funds are relatively shielded from the distress that their counterparts in developed markets are weathering, thanks to their use of 'far less' leverage, said UBS head of prime services (Asia Pacific) David Gray. ―Our clients have been extremely sensible in the way they use gearing . . . and far more constrained in their use of illiquids.‖ Still, Asian hedge funds could see redemptions of between 10 and 40 per cent. A clearer picture of the redemption rate is expected to emerge in early November. Funds' cash levels vary between 20 per cent and more than 50 per cent, ―far higher than we have seen previously‖. A year ago, cash levels were between 5 per cent and 10 per cent. UBS yesterday hosted its third pan-Asian hedge fund conference. The bank's prime brokerage is the third largest in Asia after Goldman Sachs and Morgan Stanley, with a market share estimated at about 15-17 per cent. Prime brokerage continues to generate strong results for the group.

Prime Brokerage Future Future of Prime Brokerage | Shifts in Power
The last 3 months of market activity has led to a mass re-distribution of power within the prime brokerage industry. Here is a quote from John Mack last week of Morgan Stanley speaking to this effect and of markets in 2009: Yet as Morgan Stanley and other companies move to reduce leverage, profit and revenues have plunged, forcing banks to cut back. "Any time you take a business running at 30 times (leverage) and take it down to 16 to 17, that changes the nature of your business," he said. "We have to look at that and resize it."
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 58

The Prime Brokerage Book

As many as 30 percent of hedge funds are expected to go out of business in the next year due to market losses and redemptions, Mack said. As a result, revenues flowing through Morgan's prime brokerage business will decline. Morgan Stanley shares some of the blame for being overleveraged, he said, and has been shedding assets and raising capital to reduce its leverage ratio. Morgan Stanley now has less than $20 of assets for every dollar of equity, down from more than $30. Source

Fidelity Prime Brokerage
Fidelity Investments is building out its prime brokerage. The Boston company, well-known as a mutual fund powerhouse, told the Financial Times, it is expecting to add 50 hedge funds to its client base over the next month. It currently is a prime broker to 300 hedge funds. Fidelity said half its clients have $1 billion or more. The company has been broadening its business model. It launched a prime brokerage in 2003. Source

Margin Calls | Risk of Margin Calls Associated With Frozen Prime Brokerage Accounts
The motivation to multi-prime increased more this week as hedge fund managers learn they may have to meet margin calls on securities, which are frozen within Lehman Brothers. Here is a short excerpt from a news piece on this topic: Oct. 15 (Bloomberg) -- Lehman Brothers Holdings Inc.'s hedge-fund clients may have to pay more collateral on $65 billion of assets frozen when the investment bank went bankrupt a month ago.

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

59

The Prime Brokerage Book

Lehman's London-based prime brokerage has about 3,500 active clients including hedge funds that own about $45 billion in securities, Steven Pearson, the partner at PricewaterhouseCoopers responsible for unraveling Lehman's U.K. operations, said in an interview. They hold an additional $20 billion in short positions, or bets that prices will fall. While investors are largely unable to access their Lehman accounts, the value of the securities continues to fluctuate along with the markets. The clients may be required to put up more collateral if the value of those securities drops, a process known as a margin call. ``If your bank fails, you still have to pay your mortgage,'' Pearson, 43, said in an interview in Lehman's Canary Wharf office. ``Who is the holder of the risk of the securities? The hedge funds. If the value of the securities fell, they have to meet margin calls.'' Source

Prime Brokerage Mergers & Acquisitions
As the prime brokerage industry continues to evolve I believe we will see further consolidation among competitors and even more emphasized bell shape to the industry. Here's a recent article on this topic: As the United States falters, its competitors are scheming. On Monday, Dmitri Medvedev met with the leader of one of Russia's largest conglomerates, Mikhail Fridman of the Alfa Group, and gave his strong blessing for an acquisition of foreign banking holdings (preferably American.) He interjected at one point: ―Maybe we should also buy something while it‘s not too late?‖ and later insisted quite strongly that "despite the crisis ... there are nonetheless some good opportunities for concluding investment deals," to which Mr. Fridman is reported to have said "this is absolutely correct...I fully share your view," and so on. They are not the only vultures circling. That same day, the Times reported that, late last month, executives from France's mostly-stillPrimeBrokerageGuide.com PrimebrokerageAssociation.org 60

The Prime Brokerage Book

solvent banks gathered to discuss opportunities in banking sectors traditionally dominated by American companies. For Societe Generale, that included a bid for investment banking and equity derivatives. For BNP Paribas, it was the brokerage industry. And little time was lost—last Wednesday, BNP Paribas bought over Bank of America's prime brokerage unit and now competes with JP Morgan and Goldman Sachs. Japanese companies are attempting to derive similar benefits. What can this all mean? One way to look at it is as a form of creative destruction in action, with the American model of specialist banking— that is, investment banks operating independently of commercial banks—being more vulnerable than, say, the European universal banks, though the latter have problems as well (for one thing, though a large and diversified bank is more stable than a niche one, failure of such a bank could be more catastrophic to the overall system). But the American model is still more attractive than the Russian banking model, which seems to depend on political favor and is less dynamic besides, or the Japanese model, which is an unintended consequence of absent investment opportunities within Japan itself. Read more...

Prime Brokerage Singapore
When visitors arrive at Singapore's Changi Airport, they get both an immigration card and an application form for opening a hedge fund. This was one of the jokes making the rounds in 2007. The fact is that hedge funds in Singapore were growing fast since 2006. According to an article dated Feb 2007 from eFinancialCareers, "prime brokers are in hiring mode" - Barclays Capital, Citigroup, Lehman Brothers, Morgan Stanley and UBS all hired for their Singapore prime brokerage operations in 2006. By Nov 2007, Singapore serves as prime broking regional

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

61

The Prime Brokerage Book

headquarters for Credit Suisse Group, Citigroup Inc and Barclays Capital plc, according to HedgeFund Intelligence. Citigroup and Morgan Stanley also opened Singapore prime brokerage offices in 2007, to service the fast-growing number of hedge funds in that market. Morgan Stanley, the top Singaporean prime broker by assets under management according to Eurekahedge, had previously been servicing its Singapore clients from Hong Kong. As the growth of hedge funds slowed down due to the credit crisis, an article (download pdf) dated Feb 2008 pointed out that "their (referring to the prime brokers in Singapore) enthusiasm for growth is now waning". As reported on Oct 4th, 2008, Morgan Stanley is looking at scaling back its prime-brokerage operation (detail). However others believe that "Asian hedge funds may be cold, but the Asian prime brokerage industry remains sizzling"(FINalternatives), indicated by Citi's move to add eight professionals to four Asia offices in Aug 2008, including transferring Danielle Vint to handle the prime brokerage's fixed-income desk in Singapore. It is said that Citi has fired "the latest salvo in the prime brokerage talent wars in Asia". In Feb 2008, Merrill Lynch hired Aussie hedge fund CEO Jeffrey Levy for Asia prime brokerage, to join the firm's Singapore office. Levy's hire fills the hole left by Harvey Twomey, who left Merrill Lynch to join Deutsche Bank as head of global prime finance sales in Asia. Another source reports that in Sep 2008, Deutsche Bank has moved Chris Pagan (LinkedIn) from Hong Kong to Singapore in order to head prime brokerage for Southeast Asia. by Yifei Huang

Prime Brokerage Software
Prime Brokerage is very competitive and industry players are always looking for an edge. Traiana is an example of a provider of financial technology used by banks worldwide and prime brokers involved in the foreign exchange industry. The company has recently been selected to assist ABN AMRO by
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 62

The Prime Brokerage Book

providing technological enhancements for use in their developing FX prime brokerage service. Traiana, is headquartered in San Mateo, California, with offices in New York, Chicago, London, and Tel Aviv. Customers include ABN AMRO, AIG Trading, CSFB, Deutsche Bank, JP Morgan Chase, Morgan Stanley, and Societe Generale. Source In a bid to gain market share in the ultracompetitive prime brokerage market, Credit Suisse First Boston has added a customized risk assessment and trading system to its prime brokerage unit. The new system will allow CSFB to provide its institutional clients with risk assessment across their holdings in the equity, fixed income, foreign exchange and derivatives markets, according to Philip Vasan, global head of prime services. CSFB has been considering systems to accomplish this for more than a year, he said. Recently, Advent Software has been selected by Jefferies & Company Inc., a top tier global investment bank and institutional securities firm, to provided their Advent‘s Geneva® to help in management of Jefferies‘ growing prime brokerage offerings. Advent Geneva® now serves eight out of ten of the top prime brokerage firms worldwide and is innovative beyond competitors as to its global investment management and accounting platform. Source

An Explanation | Prime Brokerage Leverage
One of key functions of prime brokers is to provide financing to its hedge fund clients, so they can acquire the leverage needed for their strategies. Since with leverage can come increased risk, the prime broker generally determines the degree of leverage that can be extended to hedge funds using a combination of stress-testing and value-at-risk, on a portfolio by portfolio (or client by client) basis. Due to the recent credit crunch, "Leverage is being closely watched," said Josh Galper, managing principal of Vodia Group, which advises hedge funds on borrowing strategies. "…the amount of leverage
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 63

The Prime Brokerage Book

being utilized is being reviewed much more carefully than it has been in the past, for obvious reasons." (See article from MarketWatch) There are two major methods that a prime broker can lend leverage to a hedge fund. The first is by providing margin financing; in other words, the hedge fund borrows some portion of the security's value from the prime broker. For example, the hedge fund holds a portfolio with a value of $100 million, using $25 million of its own assets and $75 million of margin debt provided by the prime broker. This way the hedge fund achieves a leverage of 4 to 1 (assuming only long positions), and the prime broker gains interest on the debt. The alternative way of extending leverage is through the OTC derivatives. While the structure of this form of financing varies, one approach takes the form of a managed account swap, and is usually termed "synthetic prime brokerage". The prime broker sets up an account advised (or managed) by hedge fund manager who has trading discretion. So different from the first method, in this case even though hedge fund manager trades the account to implement the hedge fund's strategy, the portfolio actually belongs to the prime broker. The prime broker then enters into a total return swap with the hedge fund, and charges the interest in the form of a swap payment received from the hedge fund. Through this synthetic prime brokerage service, the leverage used by the fund is determined by the amount of margin on the swap required by the prime broker. To follow the example above, the prime broker has an account with $100 million of its own assets. The account is advised by the hedge fund manager, where the hedge fund is the counterparty to a total return swap on that account. As margin for the swap, the prime broker requires the hedge fund to post $25 million of equity; thereby providing leverage of 4 to 1. Many hedge funds use synthetic prime brokerage service as part of a full service prime brokerage agreement - with equity swaps used side by side with stock loan and other services for particular parts of their portfolios, according to an article by HedgeWeek. Source: Hedge Funds and Prime Brokers

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

64

The Prime Brokerage Book

Guest post by Yifei Huang

Prime Broker Service Fees
Prime brokers don‘t charge fees for many of the services they provide to hedge funds. Instead, profits are usually derived from three sources: spreads on financing (including stock loan), commissions from trading, and fees for the settlement of transactions done away from the prime broker. The financing and lending spreads, which are charged in basis points on the value of client loans (debit balances), client deposits (credit balances), client short sales (short balances), and synthetic financing products. Therefore, clients who take substantial short-selling or major amounts of leverage are representatives of more lucrative opportunity than clients who do relatively less short selling and/or use minimal leverage For example, it is said, that hedge funds will pay on Wall Street record fees next year for brokerage services. This business is currently dominated by Morgan Stanley, and Goldman Sachs Group Inc. Sources say that prime-brokerage fees may increase significantly, by almost a third, to $9US.9-billion in 2009.

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

65

The Prime Brokerage Book

Lehman Bankruptcy Victims | Hedge Funds
The following is a short and far from exhaustive list of hedge funds which were recently affected by Lehman Brother's bankruptcy.  London-based MKM Longboat Capital Advisors LLP said last week it will close its $1.5 billion Multi-Strategy fund in part because of assets stuck at Lehman  Lehman Brothers Holdings Inc.'s bankruptcy probably means the end of hedge-fund manager Oak Group Inc. after 22 years in business.  Diamondback Capital Management LLC, a Stamford, Connecticut-based hedge fund, told investors that it had assets of $777 million stranded in Lehman  Managers with a smaller percentage of assets in Lehman limbo include Harbinger Capital Partners, Amber Capital LP and Bay Harbour Management LLC, which are each based in New York, and RAB Capital Plc and GLG Partners Inc., both in London  Darden Capital Management, an investment club run by students of the University of Virginia's business school, has about $6 million in four funds that are stranded. Guest post by Market Folly Permanent Link: Lehman Brothers Bankruptcy Victims - Hedge Funds

GLG Partners Exposure to Lehman Brothers
Here is a letter to investors put out by GLG partners on their homepage earlier this week. It addresses the firm's exposure to Lehman Brothers in midst of that firms bankruptcy… Dear GLG Fund Investor, We wanted to update you about the impact to us arising from the administration proceedings of Lehman Brothers International
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 66

The Prime Brokerage Book

(Europe) ("LBIE‖), and the insolvency proceedings of other entities in the Lehman Brothers group. In total, we currently estimate that the combined direct exposure of the GLG Funds to be approximately $95 million, or less than 1% of GLG's net AUM. We have detailed each Fund‘s potential exposure stemming from LBIE's administration in letters to the investors in those Funds. Our assessment of the LBIE exposure is based upon a number of assumptions (including, that amounts LBIE was required to treat for each Fund as client money and not use in the course of its business were and are, in fact, so held and will be released upon repayment by each Fund of all its debt to LBIE) and in accordance with legal and professional advice obtained. That said, until we are able to fully reconcile our information and assumptions with the administrators of LBIE, our estimates could change. Since at least the beginning of 2008, in addition to steps taken to significantly reduce our Fund assets held with LBIE, we negotiated to more fully protect any remaining assets and transactions through a series of bespoke arrangements. We have good reason to believe that these arrangements were adhered to by LBIE but until we meet with the Administrators some uncertainty will remain. We have been pressing to begin a constructive dialogue with the Administrators soon, which will enable us to refine our assessment further. Lastly, we are evaluating with the directors of our Funds how to address Fund NAV's and the October 1, 2008 dealing day. At this point, we believe that all of our Funds will be able to publish a dealing NAV as at October 1 by writing down the estimated exposure to LBIE to fair value. We believe NAVs will be published in the normal periods of time, except in a few cases where there may be a short delay while our estimates are further refined and valued. In the event that one or more Funds are ultimately unable to publish a timely NAV, the directors of these Funds will consider a number of alternatives all of which will be designed to treat all Fund shareholders equally, minimize disruption to the investment process, enable the Funds to continue to invest and permit redemption of shares in the funds.

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

67

The Prime Brokerage Book

If you have any questions, please feel free to contact your representative with any questions. Best Regards, GLG Partners LP

Lehman Bankruptcy Mess
Here is a Business Week article on the mess with Lehman Brothers: The Lehman Brothers bankruptcy is quickly becoming one giant mess. Scores of hedge funds that had hundreds of millions in cash and other securities parked with Lehman‘s prime brokerage operation in London have had their accounts frozen. A number of these hedge funds have filed formal objections with the bankruptcy court and at least one fund, New York-based Bay Harbour Management, is mounting a legal challenge to the court‘s hastilyapproved sale of Lehman‘s brokerage arm to Barclays Capital. Now a new and even more troubling scenario is arising: legal disputes stemming from the estimated $1 trillion in derivatives transactions that Lehman had entered into on behalf of itself and some of its customers. Already, at least three lawsuits have been filed, alleging that nearly $600 million in collateral posted by some of Lehman‘s trading partners in derivatives transactions hasn‘t been returned and is in jeopardy of disappearing as the bankruptcy process unfolds. To date, the most aggrieved of Lehman‘s trading partners is Bank of America, which at onetime was considering buying Lehman as the investment firm was lurching towards bankruptcy. The Charlotte, NC
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 68

The Prime Brokerage Book

based lender is seeking to recover nearly $500 million the bank ―posted as collateral to ―support derivative transactions between BofA and the respective Lehman Entities,‘‘ according to a lawsuit filed in New York State Supreme Court. Read more...

Salary Levels - Prime Brokers
According to www.indeed.com/salary Prime Brokerage Salaries in the United States are vary in different states. The average salary for entry-level prime broker in the US is $49,000 as of recent. However in NY, MA, IL, CA the average salary for entry-level prime brokers are much higher and these numbers relatively are $57K, $55K, $51K and $48K. For junior prime brokers, the average salary in the US is $52,000. In NY, MA, IL and CA these numbers are $61K, $58K, $54K and $51K. The average salary for senior executives is much higher than junior and entry level prime brokers since this number is $80,000 within the US. In the NY, MA, IL, CA relatively are $94K, $90K, $84K and $79K. What these numbers seem not to include are the monthly commission checks which are cut to successive prime brokerage relationship managers. These individuals can make $5,000100,000/month through trading commissions alone.

Rehypothication Risks, Rights & Costs
Here is a short article about the Rehypothication by prime brokerage firms, the definition of it, the risks of prime brokers
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 69

The Prime Brokerage Book

using the strategy, the rights of hedge funds who loose access to their assets and what happens to the cost of prime brokerage services when hedge funds request for their assets not to be rehypothicated. Here is a short excerpt from the article: The dangers for hedge funds of having their assets rehypothecated became painfully clear last week: $22bn of the $40bn held by Lehman‘s European prime brokerage had been rehypothecated. Hedge funds trying to reclaim the rehypothecated assets have found themselves in the queue of general creditors, likely to get back only a proportion of their money. Even those hedge funds which had insisted they did not want their assets rehypothecated – such as Amber and a small RAB Capital fund – face a long and potentially painful wait to get back securities held in segregated client accounts. PwC, administrators of Lehman‘s London business, have told hedge funds it is likely to take months to calculate how much is due to whom, and to offset this against debts. But it is rehypothecation which poses the biggest threat to hedge funds, and could lead to the biggest changes in the prime brokerage industry. The main prime brokers were almost completely selffunding, according to current and former executives, needing very little access to the balance sheet of their parent bank, thanks to hedge fund cash kept on deposit and the rehypothecation of assets. Most of the cash has already gone, hedge fund managers say, shifted away from prime brokerages to banks regarded as safer. Take away rehypothecation, and banks will have to borrow at far more expensive rates in order to lend to hedge funds, pushing down their profitability and pushing up the cost of borrowing. Read more...

Prime Brokerage Assets from Lehman

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

70

The Prime Brokerage Book

The following is an excerpt from a recent story about hedge fund assets being stuck within Lehman's prime brokerage business: Lehman Brothers Holdings Inc. will take ``considerable time'' before returning assets stranded by the world's largest bankruptcy to hundreds of hedge fund clients, according to PricewaterhouseCoopers. ``This process could take several months,'' said PwC, Lehman's bankruptcy administrator in London, in a statement today. PwC said it is working ``very closely'' with the U.K.'s Financial Services Authority to sort out how much is owed to ``many hundreds of clients'' with securities tied up at Lehman. GLG Partners Inc., which oversees $24 billion, CQS U.K. LLP and Bay Harbour Management LC are among the hedge funds that used Lehman as a prime broker for borrowing stock and clearing trades. Funds with assets at Lehman probably will have to write them down when they report net asset values, according to Laven Partners LLP, a London-based hedge fund consultant. ``If your hedge fund assets have been included with Lehman's, you're in the back of a queue that's quite long,'' said Laven Partners founder Jerome Lussan. ``What's the market value of, say, $100 million that's owed to you by Lehman? I'd say it's not that great, and it's going to have to be written down.''

Prime Brokerage Services List
Here is a short list of prime brokerage services: Lending Securities Hedge Fund Startup Services Accessing local shares abroad
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 71

The Prime Brokerage Book

Cash Management Capital Introductions - Asset Raising Real Estate Identification or Office Space - Hedge Fund hotels Access to Hedge Fund Lawyers focusing on hedge fund clients Headhunting & talent identification to help build portfolio management teams Third Party Marketing Due Diligence Clearance & Custody of Assets Portfolio Reporting Branding & Marketing IT Consultations Compliance & Risk Management Permanent Link: Prime Brokerage Services

Prime Broker Survey
A new survey shows that more than one-third of hedge fund and CTA managers are dissatisfied with their prime brokers. The most notable dissatisfaction is with the prime brokers‘ personal service. In 2007 80% of funds rated the personal service of their prime brokers as either ―good‖ or ―excellent‖, this year only 63% gave their prime brokers high marks. This may be a result of the liquidity crisis, which 16% of the managers said negatively effected the relationship with their prime broker. The survey also shows that many funds are happy with the cost of their prime brokers, with only 7% responding ―poor‖. However, a considerable 38% of managers rating their prime brokers as ―poor‖ performers of capital introduction. Funds who consider themselves technologically advanced are the most satisfied with their prime

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

72

The Prime Brokerage Book

brokers.

Prime Brokerage + Administration
More prime brokerage firms are adding on administration services to help attract and retain clients. I wasn't sure how widespread of a trend this was but saw this mentioned within an article yesterday as noted below. In recent years, the custodian banks that have acquired hedge fund administrators have sought to adjust client lists in favor of larger and more profitable hedge fund and fund of funds groups interested in a broader array of services. At the same time, prime brokers have recognized that providing administration services can help attract and retain clients and counter the shift among hedge fund managers towards multiple prime brokerage. "It would be surprising if the hedge fund administration industry continues to support such a large number of providers, and there is now evidence that a renewed round of consolidation is in the offing," says Dominic Hobson. "However, the appetite to sell may be offset as well as encouraged by the depressed prices available. In any event, the buyers are likely to be different from the banks which dominated the acquisition process in the early years of this century." Read more...

Asian Prime Broker Growth Trend
Here is an interesting article about the growth of prime brokerage services in Asia. I didn't know that
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 73

The Prime Brokerage Book

growth was so strong for these groups right now... Citigroup expects the amount of assets serviced by its Asia Pacific prime brokerage arm to grow by more than 30 percent annually over the next three to five years, as more global hedge funds set up shop in the region. Even with tumbling stock markets hammering Asia's hedge fund industry, many large international managers are doing more business in the region, drawn by its long-term potential, said Hannah Goodwin, head of Prime Finance, Asia Pacific for the U.S. banking giant. "We're looking at a 30 to 50 percent growth every year," she told Reuters in an interview. "That's how aggressive we want to be with this business and how well we think this business is going to develop for us."

Explain Prime Brokerage
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
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 74

The Prime Brokerage Book

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. Contents * 1 History * 2 Fees * 3 Risks * 4 Sources of Information * 5 List of Prime Brokers

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

75

The Prime Brokerage Book

History The basic services offered by a prime broker give a money manager the ability to trade with multiple brokerage houses while maintaining, in a centralized master account at their prime broker, all of the hedge fund‘s cash and securities. Additionally, the prime broker offers stock loan services, portfolio reporting, consolidated cash management and other services. Fundamentally, the advent of the prime broker freed the money manager from the more time consuming and expensive aspects of running a fund. These services worked because they also allowed the money manager to maintain relationships with multiple brokerage houses for IPO allocations, research, best execution, conference access and other products. The concept and term "prime brokerage" is generally attributed to the U.S. broker-dealer Furman Selz in the late 1970s. However, the first hedge fund operation is attributed to Alfred Winslow Jones in 1949. In the pre-prime brokerage marketplace, portfolio management was a significant challenge; money managers had to keep track of all of their own trades, consolidate their positions and calculate their performance regardless of which brokerage firms executed those trades or maintained those positions. The concept was immediately seen to be successful, and was quickly copied by the dominant bulge bracket brokerage firms such as Morgan Stanley, Bear Stearns, Merrill Lynch, Lehman Brothers, and Goldman Sachs. At this nascent stage, hedge funds were much smaller than they are today and were mostly U.S. domestic long-short equities funds. The first non-U.S. prime brokerage business was created by Merrill Lynch's London office in the late 1980s. Through the 1980s and 1990s, prime brokerage was largely an equities-based product, although various prime brokers did supplement their core equities capabilities with basic bond clearing and custody. In addition, prime brokers supplemented their operational function by providing portfolio reporting; initially by messenger, then by fax and today over the web. Over the years, prime brokers have expanded their product and service offerings to include some or all of the full range of fixed income and derivative
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 76

The Prime Brokerage Book

products, as well as foreign exchange and futures products. As hedge funds have proliferated globally through the 1990s and the current decade, prime brokerage has become an increasingly competitive field and an important contributor to the overall profitability of the investment banking business. As of 2006, the most successful investment banks each report over two billion dollars in annual revenue directly attributed to their prime brokerage operations (source: 2006 annual reports of Morgan Stanley and Goldman Sachs). Fees Prime brokers do not charge a fee for the bundled package of services they provide to hedge funds. Rather, revenues are typically derived from three sources: spreads on financing (including stock loan), trading commissions and fees for the settlement of transactions done away from the prime broker. The financing and lending spreads, which are charged in basis points on the value of client loans (debit balances), client deposits (credit balances), client short sales (short balances), and synthetic financing products such as swaps and CFDs (Contract for difference), make up the vast majority of prime brokerage revenue. Therefore, clients who undertake substantial short-selling or leverage represent more lucrative opportunity than clients who do relatively less short selling and/or utilize minimal leverage. Clients whose market activities are principally fixed income oriented will generally produce less prime brokerage revenue, but may still present significant economic opportunity in the repo, foreign exchange (fx), futures, and flow business areas of the investment bank. Risks Prime Brokers facilitate hedge fund leverage, primarily through loans secured by the long positions of their clients. In this regard, the Prime Broker is exposed to the risk of loss in the event that the value of collateral held as security declines below the loan value, and the client is unable to repay the deficit. In practice, such conditions arise
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 77

The Prime Brokerage Book

only in the case of extraordinary volatility or unexpected correlation reversions and are exceedingly rare. Other forms of risk inherent in Prime Brokerage include operational risk and reputational risk. Large prime brokerage firms today typically monitor the risk within client portfolios by either Value at Risk (VaR) or "Rules Based" stress testing. Stress testing entails running a series of what-if scenarios that identify the potential gains or losses for each position due to adverse market events. Examples of stress test scenarios include: * Flight to Quality * 1% up or down parallel movement in 10 year treasury yield curve [edit] Sources of Information Berman, An Introduction to Hedge Funds (Risk Books 2007) Berman (editor), Hedge Funds and Prime Brokers (Risk Books 2006). [edit] List of Prime Brokers The following firms are known to be providing prime brokerage services at present: * ABN AMRO (bought by RBS led consortium) * Banco Espirito Santo * Bank of America, sold PB business to BNP Paribas * Barclays Capital * (Bear Stearns, previously one of the dominant prime brokers, was merged into JPMorgan Chase in March, 2008) * BNP Paribas * Calyon Financial * Citigroup * CIBC World Markets * Credit Suisse * Deutsche Bank * Dresdner Kleinwort
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 78

The Prime Brokerage Book

* Fidelity Investments * Fortis * Goldman Sachs * Interactive Brokers * Jefferies & Company * JPMorgan Chase * Lehman Brothers (Bought by Barclays Capital [US Operations], Bought by Nomura September, 2008 [Asia, EU, India Branches]) * Merlin Securities (Introduces through JP Morgan and Goldman Sachs) * Merrill Lynch (bought by Bank of America - September, 2008) * Morgan Stanley * Nordea * Northern Trust * NewEdge Group (ex Fimat & Calyon Financial) * RBS * RBC Capital Markets * Rabobank * Scotia Capital * SEB * Triad Securities * UBS Source

Hedge Fund Due Diligence
Last month someone sent me this resource on due diligence. Fortis offers this guide to investment due diligence which goes beyond the initial selection process. The article focuses primarily on identifying potential problems by maintaining contact with hedge fund managers and thoroughly looking into the operations. Although much can be learned from traditional due diligence, Fortis suggests simply talking with the staff and manager. They suggest that a practical understanding of psychology helps detect the underlying factors that could effect a manager's performance. This article advocates a close relationship with the manager, adding a level of
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 79

The Prime Brokerage Book

transparency for the investor and includes helpful tips for building this relationship. Here is the full resource: Fortis Due Diligence Article

Prime Brokers in Asia / Japan / China
I recently read a short article about the prime brokerage business in Asia through FinAlternative's prime brokerage survey. Asia has a vastly expanding hedge fund industry, and prime brokerages are bolstering their capacity in Asia by buying up talented executives from the top firms. Major firms like Merrill Lynch and Morgan Stanley have struggled to retain their top executives in Asia from rival prime brokerages. Goldman Sachs now claims five managing directors of its Asian prime brokerage division, and has plans to have another series of major hiring. Asia, being the fastest growing hedge funds market, has become more and more important for successful prime brokerages.

Prime Brokerage Business Update
Here are a few details from a recent report from Finalternatives on the prime brokerage business. This report mentioned that prime brokerage firms expect $11 billion in hedge fund revenues this year, consequently major prime brokerage firms are vigorously competing for clients. JPMorgan and CitiGroup are playing catch-up with industry giants by bolstering their prime brokerage units. Meanwhile, the more established Deutsche
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 80

The Prime Brokerage Book

Bank, Morgan Stanley, Merrill Lynch and Goldman Sachs are battling for dominance over the prime brokerage industry. The two biggest prime brokers, Goldman Sachs and Morgan Stanley, are building their reputation as the best in the industry. More and more hedge funds turn to the two firms because they have a strong reputation, as well as superior technology and support capabilities. While other major firms try to catch up by buying up talent from rivals, Morgan Stanley and Goldman Sachs are securing their dominant positions in prime brokerage.

Prime Brokerage Book Review
I'm reading a book right now on prime brokers called Hedge Funds and Prime Brokers. I am about 1/3 of the way through the book right now and will publish a review of it once I am done reading the whole thing. This is the only book I have been able to find on prime brokerage. Does anyone else know of any great books on this niche of the hedge fund industry? Thanks in advance for any help you can lend me

Prime Brokerage Sales
While the credit crisis has hurt most financial firms, some boutique prime brokers have benefited. As hedge funds look out for their best interest, smaller prime brokerage shops are becoming more attractive than the largest firms. As major brokers reduce their lessprofitable hedge fund accounts, boutique primes take on these clients. Another opportunity for boutiques is that the big firms are cutting back on staff, making it easy
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 81

The Prime Brokerage Book

to attract seasoned talent to join the smaller firms. Many of these veterans bring some clients with them too. The credit crisis has in many ways helped boutique prime brokers, but it has also hurt their capital introduction capabilities. A recent FINalternatives survey revealed that over a third of all hedge funds rated their prime broker's capital capabilities as "poor". But the survey also showed that nearly 75% of hedge fund managers that called their prime broker's personal service "poor" are shopping for a new one. Many average-size funds are not given the attention from big firms that the smaller prime brokers promise; and as long as this neglect continues, boutique prime brokers will.

Prime Brokerage New York / Evolution
The prime brokerage industry is constantly evolving adapting to new client demands, opportunities and regulatory environments. I was in New York yesterday discussing some of these ongoing changes with a few prime brokerage professionals and they mentioned that several times a year there are events, which slightly reshape their industry. If you haven't read it already there was an interesting article put out by ICFA a few days ago about the changing landscape of the hedge fund prime brokerage business model. by traditional investment managers. This is leading prime brokerage The main point of change that this article pointed to was the
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 82

The Prime Brokerage Book

widespread interest in hedge fund‘s clients to service clients who also run 130/30 and long only portfolios as well. "According to a recent Vodia Group survey traditional asset managers have 3 per cent of their asset base - equivalent to $1.95trn - in leveraged investments, with 86 per cent of major asset managers expecting to run 130/30s by mid-2009. The firm predicts that leveraged assets will increase from $2.65trn today to $4.48trn in 2012, driving greater demand for prime brokerage services." "But traditional asset management clients are forcing prime brokers to adapt their business model, placing greater emphasis on custody, reporting and risk management and de-emphasizing capital introduction and leverage. These factors will push margins lower and increase operational requirements in the prime brokerage business, Vodia said." While I can see why the largest of institutional money managers are not going to be drawn by the hopes of capital introduction I still believe that those prime brokers who do offer capital introduction services will have a competitive advantage while competing for the business of hedge fund managers here in the US. Every year the field becomes more competitive, and most hedge funds need help marketing and raising capital.

Prime Brokerage Survey

A Recent Prime Brokerage Survey FinAlternatives just released a prime brokerage survey; it contains some interesting details on how satisfied hedge funds are with their prime brokerage service providers. The survey digs into the quality of
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 83

The Prime Brokerage Book

capital introduction, execution and personal service received from their prime broker. What is interesting was that 38% of hedge fund Manager respondents noted that their prime broker's capital introduction capabilities were non-existent or very weak. Another interesting point was that poor personal service was the #1 reason that a hedge fund manager would switch prime brokers. Here is the full report and prime brokerage survey.

Prime Brokerage Market Share
A good read titled "Battle of the Bulges" pointed out that competition for gaining prime brokerage market share is growing fiercer with more than $11 billion in expected hedge fund revenues in 2008, a 15% increase over 2006 (reported by TABB Group). The fight for market share is even more intense among the industry's top players. For years the prime brokerage industry has been dominated by three firms—Goldman Sachs, Morgan Stanley and Bear, which collectively owned about two-thirds of the market. As of year-end 2006, the Lipper HedgeWorld prime brokerage league table ranked Morgan Stanley first (with 23% of the market and $153 billion in assets), followed by Bear (21%, $136 billion), Goldman (18%, $119 billion), UBS (7%, $47 billion) and Credit Suisse (4%, $25 billion), in terms of market share based on assets. As Bear collapsed in March 2008, and Morgan Stanley and Goldman Sachs struggle to maintain their dominance in the industry, other major financial services firms are stepping up their prime brokerage efforts, including JPMorgan Chase, Deutsche Bank, UBS, Credit Suisse and BNP Paribas. JPMorgan Chased was only ranked eighth in the Lipper survey with just a 2.3% market share, now it is given a quick entry into prime brokerage as long as Bear's hedge fund clients are successfully locked down. BNP Paribas bought Bank of
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 84

The Prime Brokerage Book

America's equity prime brokerage division that was ranked the sixthlargest in the country by assets at the end of 2006 by Lipper HedgeWorld, thus was instantly made one of the largest prime brokers in the U.S. The recent turbulence in the prime brokerage industry also accelerated the trend of hedge funds moving away from replying on just one prime broker. Traditionally hedges funds are unwilling to switch prime brokers or increase the number of their prime brokers (TABB report). As Michael Guarasci, partner at hedge fund Indus Capital Partners said, "We have long-standing relationship with our prime brokers, so if a new company wants to come in and do business with us, it may not get anywhere because we're pretty happy with our service. It's not easy to switch prime brokers." (full article). Now more and more hedge funds are adding prime brokers to limit counterparty risk since the fall of Bear (ref). This created considerable opportunity for new players to enter or existing players to take a bigger piece of the market share, as pointed out in an article by Merrill Lynch: "The multi-prime broker environment overcoming the challenges and reaping the benefits" (download the pdf). Guest post by Yifei Huang

Prime Brokerage Association (PBA)
The Prime Brokerage Association (PBA) is a 600 person strong networking organization focused on the hedge fund prime brokerage industry. The Prime Brokerage Association provides free-to-access articles and resources to prime brokerage professionals, serves a source of inter-industry networking and works to improve the overall image of the prime brokerage industry to the general public. To Join the PBA Click Here

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

85

The Prime Brokerage Book

Capital Introduction Team Due Diligence
It is important to conduct due diligence on the capital introduction team you might begin working with before you sign up for their related prime brokerage services. Here the areas we suggest you investigate before moving your prime business:  How many professionals are dedicated to working on your capital introduction team?  What are your capital introduction fees on top of the regular prime brokerage fees?  Do you have a detailed description of what your capital introduction services includes and does not include?  How has your capital raising track record evolved since you began offering capital introduction services to your clients?  How does your firm partners or work with third party marketing firms or outside capital introduction experts? In addition to these questions search their website and online for capital introduction jobs related to the firm. If they are hiring 10 year industry veterans or fresh college graduates this can tell you a bit about their approach as well.

The Problem With Capital Introductions
The main problem with capital introductions being made by prime brokerage firms is that many firms are not competitive enough to market. Many managers with negative or sub-par performance would still like to grow their business but the fact is most investors won't consider hedge fund managers who are both relatively small and have mediocre or poor performance, there is nothing engaging enough that will convince investors to look past those two facts, they hear hundreds of stories and see as many teams pitching their outlook on the markets each year. This leaves prime brokerage firms with two choices - offer capital
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 86

The Prime Brokerage Book

introduction services knowing that there is almost no chance of raising assets or tell the hedge fund manager that they will not be able to market their strategy. The best prime brokers will often help with pre-marketing activities such as operational and risk assessments, marketing material scrubbing, newsletter development, etc. This may seem straightforward but it is often an unsaid thorn in the side of prime brokerage firms offering capital introductions for hedge fund managers. They want to provide this service to everyone possible but by nature only 10-25% of all clients really qualify for the service.

US Prime Brokerage
I recently commented about how unwise it was to only have one prime broker and separately about how concerns were starting to focus on Morgan Stanley and Goldman, something that would have until this weekend seemed laughable. Well, it appears that prime brokerage clients of Morgan Stanley and Goldman have started getting jitters, to the delight of other prime brokers with banking parentage. With Lehman Administrators confirming that there would be no early return of Prime Broking client assets, hedge funds are starting to look at migrating some of their business. Until now, Goldman and Morgan Stanley were the prime brokers firms wanted to be with. They dominated the prime broking market and had their choice of which clients to accept. For most firms, an account with GS or MS was a seal of approval that they could show to investors, since those brokers didn't accept "dodgy" accounts. Read more here... Permanent Link: US Prime Brokerage

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

87

The Prime Brokerage Book

Prime Brokerage Chicago
I recently interviewed a prime brokerage partner in Chicago, IL and he shared the following industry trends with me:  Capital introduction services are in higher demand than ever  The strongest prime brokerage teams aren't always the most well known or largest in size as they have problems serving all of their clients well  Service is still a competitive advantage for many prime brokerage firms who are used to working with clients tired of the large prime shops not giving them any service If you are looking for prime brokerage contacts in Chicago please email [email protected].

Prime Brokerage Clearance Services
Clearing is one of the many services prime brokerage firms offer. Lately most hedge funds which I have spoken to are switching prime brokerage firms or adding a second prime broker due to main reasons: Service Issues Capital Introduction Services Many funds seem to care less about some of the mechanics behind how their funds are serviced as they seem almost identical - while caring greatly about the level of service and any capital introduction services which may exist while working with a certain prime brokerage shop.

An Explanation | Prime Brokerage Derivatives
One of key functions of prime brokers is to provide financing to its hedge fund clients, so they can acquire the leverage needed for their strategies. Since with leverage can come
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 88

The Prime Brokerage Book

increased risk, the prime broker generally determines the degree of leverage that can be extended to hedge funds using a combination of stress-testing and value-at-risk, on a portfolio by portfolio (or client by client) basis. Due to the recent credit crunch, "Leverage is being closely watched," said Josh Galper, managing principal of Vodia Group, which advises hedge funds on borrowing strategies. "…the amount of leverage being utilized is being reviewed much more carefully than it has been in the past, for obvious reasons." (See article from MarketWatch) There are two major methods that a prime broker can lend leverage to a hedge fund. The first is by providing margin financing; in other words, the hedge fund borrows some portion of the security's value from the prime broker. For example, the hedge fund holds a portfolio with a value of $100, using $25 million of its own assets and $75 million of margin debt provided by the prime broker. This way the hedge fund achieves a leverage of 4 to 1 (assuming only long positions), and the prime broker gains interest on the debt.

The alternative way of extending leverage is through the OTC derivatives. While the structure of this form of financing varies, one approach takes the form of a managed account swap, and is usually termed "synthetic prime brokerage". The prime broker sets up an account advised (or managed) by hedge fund manager who has trading discretion. So different from the first method, in this case even though hedge fund manager trades the account to implement the hedge fund's strategy, the portfolio actually belongs to the prime broker. The prime broker then enters into a total return swap with the hedge fund, and charges the interest in the form of a swap payment received from the hedge fund. Through this synthetic prime brokerage service, the leverage used by the fund is determined by the amount of margin on the swap required by the prime broker. To follow the example above, the prime broker has an account with $100 million of its own assets. The account is advised by the hedge fund manager, where the hedge fund is the counterparty to a total return swap on that account. As margin for the swap, the prime broker requires the hedge fund to post $25 million of equity; thereby providing leverage of 4 to 1.

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

89

The Prime Brokerage Book

Many hedge funds use synthetic prime brokerage service as part of a full service prime brokerage agreement - with equity swaps used side by side with stock loan and other services for particular parts of their portfolios, according to an article by HedgeWeek. Source: Hedge Funds and Prime Brokers

Prime Broker Investments in Technology
Traiana is a leading provider of financial technology used by banks worldwide and prime brokers involved in the foreign exchange industry. The company has recently been selected to assist ABN AMRO by providing technological enhancements for use in their developing FX prime brokerage service. Traiana, is headquartered in San Mateo, California, with offices in New York, Chicago, London, and Tel Aviv. Customers include ABN AMRO, AIG Trading, CSFB, Deutsche Bank, JP Morgan Chase, Morgan Stanley, and Societe Generale. Source In a bid to gain market share in the ultracompetitive prime brokerage market, Credit Suisse First Boston has added a customized risk assessment and trading system to its prime brokerage unit. The new system will allow CSFB to provide its institutional clients with risk assessment across their holdings in the equity, fixed income, foreign exchange and derivatives markets, according to Philip Vasan, global head of prime services. CSFB has been considering systems to accomplish this for more than a year, he said. Recently, Advent Software has been selected by Jefferies & Company Inc., a top tier global investment bank and institutional securities firm, to provided their Advent‘s Geneva® to help in management of Jefferies‘ growing prime brokerage offerings. Advent Geneva® now serves eight out of ten of the top prime brokerage firms worldwide and is innovative beyond competitors as to its global investment management and accounting platform. Source
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 90

The Prime Brokerage Book

An Explanation | Prime Brokerage Services of Hedge Funds
One of key functions of prime brokers is to provide financing to its hedge fund clients, so they can acquire the leverage needed for their strategies. Since with leverage can come increased risk, the prime broker generally determines the degree of leverage that can be extended to hedge funds using a combination of stress-testing and value-at-risk, on a portfolio by portfolio (or client by client) basis. Due to the recent credit crunch, "Leverage is being closely watched," said Josh Galper, managing principal of Vodia Group, which advises hedge funds on borrowing strategies. "…the amount of leverage being utilized is being reviewed much more carefully than it has been in the past, for obvious reasons." (See article from MarketWatch) There are two major methods that a prime broker can lend leverage to a hedge fund. The first is by providing margin financing; in other words, the hedge fund borrows some portion of the security's value from the prime broker. For example, the hedge fund holds a portfolio with a value of $100, using $25 million of its own assets and $75 million of margin debt provided by the prime broker. This way the hedge fund achieves a leverage of 4 to 1 (assuming only long positions), and the prime broker gains interest on the debt. The alternative way of extending leverage is through the OTC derivatives. While the structure of this form of financing varies, one approach takes the form of a managed account swap, and is usually termed "synthetic prime brokerage". The prime broker sets up an account advised (or managed) by hedge fund manager who has trading discretion. So different from the first method, in this case even though hedge fund manager trades the account to implement the hedge fund's strategy, the portfolio actually belongs to the prime broker. The prime broker then enters into a total return swap with the hedge fund, and charges the interest in the form of a swap payment
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 91

The Prime Brokerage Book

received from the hedge fund. Through this synthetic prime brokerage service, the leverage used by the fund is determined by the amount of margin on the swap required by the prime broker. To follow the example above, the prime broker has an account with $100 million of its own assets. The account is advised by the hedge fund manager, where the hedge fund is the counterparty to a total return swap on that account. As margin for the swap, the prime broker requires the hedge fund to post $25 million of equity; thereby providing leverage of 4 to 1. Many hedge funds use synthetic prime brokerage service as part of a full service prime brokerage agreement - with equity swaps used side by side with stock loan and other services for particular parts of their portfolios, according to an article by HedgeWeek. Source: Hedge Funds and Prime Brokers

Prime Brokerage Rankings
A quantitative and comprehensive analysis of global prime brokerage firms was presented in the 2007 Lipper HedgeWorld Prime Brokerage League Table. The research shows that the largest prime brokers by total 2006 assets are Morgan Stanley, Bear Stearns, Goldman Sachs, UBS and Credit Suisse. Surveys by Alpha Magazine indicate that the most important aspect of service in prime brokers was operations, followed by client service, reporting and reporting technology, securities lending, trade execution and trading technology, financing, capital introduction and business consulting. Ranking of the prime brokers in 2007 according to the aforementioned criteria can be found

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

92

The Prime Brokerage Book

on their webpage. However, after the financial turbulence in the past six months, "there was likely to be a concentration of prime broking business with a smaller number of large service providers", said Mehraj Mattoo, global head of Comas, Commerzbank's fund of hedge funds unit, in an article by David Walker "How many prime brokers will be left?" There has also been significant brokerage business flow among the remaining prime brokers. Hedge funds that account for about 10 percent of Morgan Stanley's prime-brokerage balances withdrew their money or told the firm they planned to (bloomberg news). Banks that are taking on new hedge-fund business include JPMorgan (a spokesman confirmed that the bank has seen a significant jump in volume and "they are managing it well."), Deutsche Bank, BNP Paribas, Credit Suisse and Citigroup (more). Guest post by Yifei Huang

Prime Brokerage Fees
Prime brokers don‘t charge fees for many of the services they provide to hedge funds. Instead, profits are usually derived from three sources: spreads on financing (including stock loan), commissions from trading, and fees for the settlement of transactions done away from the prime broker. The financing and lending spreads, which are charged in basis points on the value of client loans (debit balances), client deposits (credit balances), client short sales (short balances), and synthetic financing products. Therefore, clients who take substantial short-selling or major amounts of leverage are representatives of more lucrative opportunity than clients who do relatively less short selling and/or use minimal leverage For example, it is said, that hedge funds will pay on Wall Street
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 93

The Prime Brokerage Book

record fees next year for brokerage services. This business is currently dominated by Morgan Stanley, and Goldman Sachs Group Inc. Sources say that prime-brokerage fees may increase significantly, by almost a third, to $9US.9-billion in 2009.

Prime Brokerage Conference | Review
Here is a list of prime brokerage related conferences offered in the past: IBC's Annual Hedge Fund Administration and Prime Brokerage Conference The pdf brochure for the meeting held in Apr 2008 can be downloaded here There was a 50-minute panel discussion ("How is the Prime Broker & Hedge Fund Relationship Evolving?") about the following topics: Comments on the existing prime broking scene What do COO's see as a major problem in the structuring of prime brokerage How do prime brokers respond to this How are prime brokers adapting their business offerings to new hedge fund strategies Can one prime broker be all things to all hedge fund managers? Panellists included Stephen Foster (CREDIT SUISSE) and Todd Johnson (CITI). City & Financial: The Future of Prime Brokerage (One Day Conference) Offered in 2006(detail) and 2007(detail), both conferences had Timothy Spangler as the chairman. The pdf brochure for the 2007 meeting can be downloaded here Smith Barney Citigroup Financial Services Conference (annually) SIFMA's Fixed Income & Derivatives Operations Conference (Oct 2007)
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 94

The Prime Brokerage Book

"Listen to senior operations professionals discuss the significance of Prime Brokerage services to investors. Hear how Prime Brokerage has effected the modernization of trading, operations and technology. Hear what investors needs are with respect to these services and what dealers can do to meet these needs." (download pdf file: "Prime Brokerage: The Evolving Landscape") by Yifei Huang

BANK PRIME BROKERAGE OFFERINGS
Jefferies Prime Brokerage Jefferies & Company Inc., is a global investment bank and institutional securities firm who provides capital market and financial advice services to its clients. Along with this they provide institutional brokerage, securities research and asset management. Jefferies is also a leading provider in equity, high yield, convertible and international securities, for high net worth investors and investors for institutions. Source Linedata Services is a leading global provider of the latest in the financial technologies market. Recently, Linedata has been selected by Jefferies & Company‘s Prime Brokerage Unit in order to implement the use of their Long View trading Order Management System for its hedge fund clients. This will help to meet the growing demand of the best financial technology for hedge fund clients within their prime brokerage unit. Source Jefferies & Company, Inc, has recently hired Senior professionals; Robert E. Enslein Jr. and Jeffery M. McCarthy, to join their company as Senior Vice Presidents. Their job will be to focus on capital introduction. A third, Robin H. Fink has joined in order to focus on prime brokerage sales. Source Jefferies & Company has expanded and is now officially a part of prime brokerage business. The company has been adding to its staff
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 95

The Prime Brokerage Book

and implementing the talented of its previous affiliate Bank of America. Some wellknown ones include Penn Miller-Jones, former Senior Salesman, and John Kunze, prior head of technology to name a few. These heads will hold similar position in Jefferies heading the new development of the company. Source

HSBC Prime Brokerage
Last year HSBC Securities Services was ranked #1 in R&M Fund Accounting and Administration Survey for a third year in a row. R&M Surveys being an independent market research administration that specializes in investor services industry. The questionnaire for the survey ranked various providers on 34 aspects of the services they provide from services such as transaction processing, to communications, as well as the quality of employees and the service value for the money. Source HSBC Holdings Plc. is Europe's biggest bank by market value. It is now attracting hedge fund businesses because of its focus on the concerns of prime brokers under the thread of market collapse. The company is now in cooperative talks with various hedge funds with more than $100 billion in assets. They are now focused on providing some services offered by prime brokers to its single-strategy hedge fund clients. These services would include foreign exchange and treasury products, in addition to the traditional administration and custody functions. Source HSBC Securities Services (HSS) is soon to provide alternative fund services with in the nation of Australia. They are now offering local fund accounting, investor servicing and financial reporting to hedge fund managers, fund of hedge fund managers, and absolute return fund managers as well as private equity partners. HSS is a part of the Bank that has grown greatly in recent years and it now has 382 billion
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 96

The Prime Brokerage Book

Australian Dollars in funds under custody as of July 2008. Source

CIBC Prime Brokerage
Some notes and stories related to prime brokerage services offered by CIBC. CIBC Mellon Global Securities Services Company is a leading provider of finance services sizeable institutions and corporations. They provide services such as multi currency accounting, securities lending, information delivery, and exchange services within the nation of Canada. Recently CIBC Mellon Global Securities Services announced it reached top rank in the Canadian sub-custody, as relayed by leading clients from Global Custodian Magazine‘s 2008 Agent Banks. Along with this it has reached first place in both leading and cross-border clients. Source CIBC Mellon is jointly owned by Canadian Imperial Bank of Commerce and The Bank of New York Mellon Corporation. A superior leader in providing asset servicing, securities lending, and exchange services in Canada, among other services, CIBC Mellon recently informed the public of its reappointment by Russell Investments Canada to provide services for them as well. Being a fine partner, Russell Investments Group provides a wide variety of quality investment products. Source CIBC World Markets is a leader in prime brokerage in Canada. It is a Canadian provider of Prime Brokerage services for alternative investment managers. They provide a prime brokerage accounting and reporting platform for which hedge fund companies and clients can use with a wide selection or group of services in trade execution, securities lending, reporting, research, and capital introduction. Source

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

97

The Prime Brokerage Book

Barclays Prime Brokerage
Here is a collection of stories related to Barclays Prime Brokerage Services: Resource #1: (12.1.08) Barclays cut its prime brokerage staff as it finishes integrating the Lehman business it acquired. Barclays snapped up the Lehman unit after Lehman went into bankruptcy in mid-September. About 100 people or 30% of the staff in the prime brokerage unit were let go, according to someone familiar with the matter. The cuts were across both firms and all roles where there was overlap between Barclays and Lehman. Some of the staff found other jobs at Barclays the source said. Although the cut seems small given the more than 50,000 that Citi recently said it was laying off, it still adds to the continued exodus of staff on Wall Street. JPMorgan Chase is planning to lay off about 3,000 people and Goldman Sachs is planning a 10% cut, according to Bloomberg. source Resource #2: Barclays has agreed to buy Lehman Brother‘s North American investment-banking group, including its prime brokerage, just days after effectively forcing Lehman into bankruptcy. New York-based Lehman filed for Chapter 11 on Monday after talks with Barclays about buying the whole of Lehman broke down. But yesterday, it agreed to pay $250 million for Lehman‘s investment banking and capital markets operations in North America, which has about 10,000 employees. Barclays also agreed to pay another $1.5 billion for Lehman‘s Times Square headquarters and two data centers in New Jersey. ―The proposed acquisition of Lehman Brothers North American investment banking and capital market operations accelerates the
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 98

The Prime Brokerage Book

execution of our strategy of diversification by geography and business in pursuit of profitable growth on behalf of our shareholders, in particular increasing the percentage of Barclays earnings sourced in North America,‖ Barclays CEO John Varley said. Barclays will also ―immediately commence discussions‖ about buying Lehman operations outside of the U.S., Lehman said in a statement. ―This is a wonderful outcome for a great number of our employees that will preserve and strengthen our terrific franchise,‖ Lehman CEO Richard Fuld said. Read more here...

Credit Suisse Prime Brokerage Services Notes
Here is a collection of publicly available articles on Credit Suisse Prime Brokerage Services: Scores of big hedge funds have been shifting billions of dollars in prime brokerage business away from Morgan Stanley and Goldman Sachs to operations housed in large commercial banks, in what is being viewed as a massive flight to safety, write Greg Farrell and Henny Sender in New York . Traders at JPMorgan Chase, Citigroup, Deutsche Bank and Credit Suisse are among those who describe themselves as "inundated" with business from hedge fund managers moving their trading and execution away from the last two remaining independent investment banks. In recent weeks, prime brokerage business had been migrating away from Lehman Brothers, as the market perception of that firm began to worsen.
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 99

The Prime Brokerage Book

But after Lehman's collapse into bankruptcy protection on Monday, along with Merrill Lynch's decision to be acquired by Bank of America, the gradual ebb of prime brokerage business away from the independents rose to a flood. Read more...

Morgan Stanley Prime Brokerage
Below are a series of resources related to Morgan Stanley's Prime Brokerage business: Resource #1: (11.17.08) Kurt Baker, the head of Morgan Stanley's prime brokerage in Asia, is leaving the firm, a company spokesman confirmed Wednesday, but declined to comment further. Baker's departure comes a week after Morgan Stanley confirmed additional worldwide job cuts. It said it would reduce 10% of its staff in institutional securities, which includes prime brokerage, as well as 9% in asset management, which manages mutual funds and other investment instruments. The firm has already cut about 10% of its work force this year. Since June 2007, the bank has cut around 4,500 employees, bringing its total staff to about 46,500 as of Aug. 31, 2008. Morgan Stanley's prime brokerage, one of the two largest in the Asia, has been hurt by a worldwide hedge-fund slump. The hedge-fund industry has been struggling against trailing performance and a rising tide of redemptions. In Asia, the hedge-fund industry has been especially vulnerable to a focus on stocks and a tendency to go long. The Eurekahedge Asian Hedge Fund Index is down 21.6% so far this year. Morgan Stanley's prime brokerage operations, in particular, were hit after Lehman Brothers Holdings Inc. filed for bankruptcy protection in mid-September. Concerns about the stability of investment banks
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 100

The Prime Brokerage Book

caused some hedge-fund clients to move assets. Source Resource #2: Stu Hendel will rejoin the Firm as Global Head of Prime Brokerage. He will be based in New York and report to Rich Portogallo, Head of the U.S. Equity Division and Global Equity Financing Services. In this role, Mr. Hendel, 48, will oversee the Firm‘s global prime brokerage business focusing on growing Morgan Stanley‘s market leading franchise and meeting the evolving needs of clients. Mr. Hendel will also work closely with senior management in the Equities and Fixed Income divisions on defining and executing strategic direction for the group. ―We are delighted that Stu Hendel has chosen to return to Morgan Stanley,‖ said Jerker Johansson, Global Head of Equities and CoHead of Institutional Sales and Trading at Morgan Stanley. ―Stu had been instrumental in helping to build our prime brokerage business into the recognized market leader today. His experience and skill make him perfectly suited to continue our momentum in this business.‖ Mr. Hendel rejoins Morgan Stanley from Eton Park, where he served as the Chief Operating Officer since that firm was organized in 2004. ―Stu's innovation, content, passion and recent experience at one of the world‘s most respected alternative investment firms will only further serve to reinforce our commitment to our clients and our staff,‖ said Rich Portogallo. ―We are thrilled to have him back.‖ Prior to joining Eton Park, Mr. Hendel spent 15 years at Morgan Stanley. He held a number of senior management positions in Prime Brokerage from 1993 to 2004, most recently serving as Co-Head of U.S. Prime Brokerage. Prior to that, Mr. Hendel worked in the legal division of Morgan Stanley from 1989 to 1993. Mr. Hendel received his J.D. from Cornell Law School 1983 where he served as business manager of the Law Review. He graduated from Wesleyan University in 1980. Mr. Hendel will rejoin Morgan Stanley in early 2007.
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 101

The Prime Brokerage Book

Goldman Sachs Prime Brokerage
Many are now wondering what surprises Morgan Stanley and Goldman Sachs might have in store after several other large banks and insurance firms have fallen. Here's a short story related to this topic: Resource #1: (11.6.08) Great piece here by the FT about how Goldman Sachs is booting some of their hedge fund clients off of their platform. This opens the doors again for independent or mini prime brokerage shops to pick up the pieces left behind by larger operations such as Goldman. In the last 9 months there has been more prime brokerage account closing, creating and multi-priming than there was over the previous 3 years. Here is the story excerpt: Goldman Sachs is cutting back the number of its hedge fund clients in an indication of tougher market conditions and of the changes sweeping through what was once the premier investment bank. "Their ability to leverage themselves has been affected by their new reiteration," says George Kellner, founder of hedge fund Kellner, DiLeo. "They are reviewing many of their relationships." That review is especially intensive for hedge funds pursuing strategies that involve trading securities that aren't very liquid, such as convertible bonds, or that rely on the massive use of borrowed money, such as the computer-driven strategies that seek to profit from small price discrepancies. During the bull market, such strategies appeared liquid and borrowing was cheap. But in recent months, prime brokers raised the cost of funding and many hedge funds were forced to sell convertible and junk-rated bonds that dealers can't readily lend. Such securities have become "dead-end collateral" in Wall Street parlance. Read more...

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

102

The Prime Brokerage Book

Resource #2: The spiraling downward of financial confidence has sprouted up in various areas. Bloomberg reports that hedge funds making up ―less than 10%‖ of Morgan Stanley‘s prime brokerage balance are withdrawing their assets from the firm, or plan to do so. The article cites ―a person with direct knowledge of the matter.‖ The article notes that Deutsche Bank AG (DB), Citigroup (C), Credit Suisse Group AG (CS) and JPMorgan Chase (JPM) ―are picking up Morgan Stanley‘s clients.‖ The threat to hedge funds‘ assets is real, the article suggests: Lehman has frozen ―billions‖ in hedge fund money inside its prime brokerage unit since it filed bankruptcy on Monday. Pension funds try and strangle short sales But some are fighting the good fight, apparently. Dow Jones Newswires is reporting that the California Public Employees Retirement System (CALPERS) is ―no longer lending out shares‖ of Goldman Sachs (GS) and Morgan Stanley (MS), hoping to ―limit short-selling‖ of the stocks. The wire quotes Clark McKinley, a CALPERS spokesperson, as saying ―We don‘t want to inadvertently contribute to the instability of these companies or the market.‖ DJ notes that Cali‘s teachers pension system yesterday stopped lending shares of both stocks, and sent a letter to 60 of its fellow pension funds urging them not to lend. Read more...

Lehman/ Barclays Prime Brokerage Services
Barclays Plc, the U.K.'s third- biggest bank, will acquire the North American investment-banking business of bankrupt Lehman Brothers Holdings Inc. for $1.75 billion, three days after abandoning plans to buy the entire firm . Barclays rose as much as 11 percent in London trading after it agreed to pay $250 million in cash for the Lehman operations and $1.5 billion for the New York headquarters and two data centers, it said today in a statement. The London-based bank plans to raise at least 600 million pounds ($1.1 billion) in a stock sale to help fund the
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 103

The Prime Brokerage Book

deal and may buy other Lehman units. "The purchase includes the equities and fixed-income sales, trading and research businesses, commodities and foreign exchange, merger advisory and prime brokerage units, Barclays said." Read more... Lehman Brothers Bankruptcy

BNP Paribas Prime Brokerage
Here is a collection of publicly available stories on BNP Paribas SA prime brokerage services: Resource #1: (11.16.08) BNP Paribas SA, France's biggest bank, won prime brokerage business in Asia with hedge fund CQS (U.K.) LLP as it seeks to lure clients in the region from rivals. The new contract with CQS, a Londonbased hedge fund manager that has an office in Hong Kong and oversees about $7.5 billion, adds to BNP Paribas's existing relationships with major hedge funds in the region, according to Talbot Stark, global head of BNP Paribas hedge fund relationships. He declined to name other existing clients. ``We have prime brokerage relationships with three or four of the
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 104

The Prime Brokerage Book

market leaders in Asia that are outperforming their peers and look to be longer-term survivors in the Asian hedge fund market,'' Stark, 43, said in a telephone interview yesterday. ``We're in discussions with several other key players that are making decisions to change their prime brokerage providers and are seeking alternative providers that are established and committed to the region.'' Commercial banks such as BNP are seeking to win customers from established players in the hedge fund market after the collapse of Lehman Brothers Holdings Inc. and Bear Stearns Cos. rattled confidence in securities firms. Goldman Sachs Group Inc. and Morgan Stanley were ranked by a Westborough, Massachusettsbased Tabb Group LLC report in May as the two biggest prime brokers worldwide. Prime brokerages offer hedge funds services such as clearing, custody, securities lending and financing for assets. They also introduce fund managers to investors. Source

Resource #2: BNP Paribas SA, France's biggest bank, said it got a ``flood'' of clients at its prime brokerage since Lehman Brothers Holdings Inc. filed for bankruptcy on Sept. 15. BNP Paribas expanded its services for hedge funds in June, when it bought Bank of America Corp.'s prime brokerage unit. The unit provides record-keeping, securities lending and secured financing to more than 500 hedge funds and has 320 employees, the company said. ``That acquisition now looks timely in these markets as people are in the middle of a flight to quality,'' said Talbot Stark, global head of BNP Paribas hedge fund relationships, in an interview today. ``Foremost on people's minds is ensuring that wherever they decide to put assets, they will be secure.'' Lehman won't return ``billions'' of frozen prime-brokerage assets ``in the short term,'' Stephen Pearson, a partner at
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 105

The Prime Brokerage Book

PricewaterhouseCoopers, administrator for the Lehman bankruptcy, said yesterday. GLG Partners Inc., the $24 billion hedge fund that started as a unit of Lehman 13 years ago, this week said some ``residual'' trades with Lehman didn't clear before it filed the biggest bankruptcy in history. While Stark wouldn't specify how much money hedge funds have moved to BNP Paribas, he said the company is now taking only 24 hours to sign complex prime brokerage agreements that used to take as long as three months to negotiate. Read more... Resource #3: The FINANCIAL -- BNP Paribas is pleased to announce it has completed the acquisition of Bank of America's equity prime brokerage business. The equity prime brokerage business provides a wide range of services to hedge funds and mutual funds. We believe it is a low risk, low capital consumption, service oriented business. The deal, announced on June 10 of this year, brings more than 500 clients and over 300 employees to BNP Paribas Corporate and Investment Banking. The transaction involves the transfer of client relationships, employees and technology systems. Yann Gerardin, Global Head of Equity and Commodity Derivatives, said: ―The strategic fit of this acquisition is excellent. Combining the Bank of America prime brokerage business with our global platform and leading derivatives business creates a prime brokerage business of choice. It is an important advantage for clients to partner with a bank like BNP Paribas , with a AA+ credit rating and global reach‖. Todd Steinberg, Head of Equity and Commodity Derivatives for the Americas, said: ―We are thrilled the deal has closed on schedule. Our goal was to move the business over seamlessly for clients and employees and we have achieved this. ―

Chase Prime Brokerage
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 106

The Prime Brokerage Book

Here is a collection of publicly available articles related to Chase prime brokerage: Scores of big hedge funds have been shifting billions of dollars in prime brokerage business away from Morgan Stanley and Goldman Sachs to operations housed in large commercial banks, in what is being viewed as a massive flight to safety, write Greg Farrell and Henny Sender in New York . Traders at JPMorgan Chase, Citigroup, Deutsche Bank and Credit Suisse are among those who describe themselves as "inundated" with business from hedge fund managers moving their trading and execution away from the last two remaining independent investment banks. In recent weeks, prime brokerage business had been migrating away from Lehman Brothers, as the market perception of that firm began to worsen. But after Lehman's collapse into bankruptcy protection on Monday, along with Merrill Lynch's decision to be acquired by Bank of America, the gradual ebb of prime brokerage business away from the independents rose to a flood. APG, manager of Europe's biggest pension fund, said: "We have stopped stock lending in several American, but also European, banks whose shares face the most downward pressure, among others, from short-sellers." Read more... Permanent Link: Chase Prime Brokerage

Citigroup Prime Brokerage
Here is a collection of publicly available articles related to

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

107

The Prime Brokerage Book

Citigroup prime brokerage: Resource #1 (2.4.09) Citigroup's Andrew Hill, who currently coheads the firms prime brokerage sales business in Japan, is being relocated to Singapore, a Citigroup spokesperson confirmed to IDD. In his new role, Hill will work towards building the roster of hedge fund clients in Southeast Asia and India. He will also oversee Citi's US prime brokerage business, and will continue to oversee prime finance sales for Japan. Hill's specific focus will be on equity and fixed income prime brokerage. He will work alongside Alex Knight, who oversees the foreign exchange prime brokerage business for Citi in Asia. source Resource #2: (12.6.08) Citigroup has reportedly cut 15% of its Citi Prime Finance staff, including 14 members of its New York office. Five of those took severance packages; the rest were laid off. As part of the downsizing, Citi‘s prime brokerage group will no longer offer business consultancy services to hedge funds, Hedge Fund Alert reports. It remains committed to other services including clearing, securities lending, capital introduction and execution. source

Resource #3: Scores of big hedge funds have been shifting billions of dollars in prime brokerage business away from Morgan Stanley and Goldman Sachs to operations housed in large commercial banks, in what is being viewed as a massive flight to safety, write Greg Farrell and Henny Sender in New York . Traders at JPMorgan Chase, Citigroup, Deutsche Bank and Credit Suisse are among those who describe themselves as "inundated" with business from hedge fund managers moving their trading and execution away from the last two remaining independent investment banks. In recent weeks, prime brokerage business had been migrating away
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 108

The Prime Brokerage Book

from Lehman Brothers, as the market perception of that firm began to worsen. But after Lehman's collapse into bankruptcy protection on Monday, along with Merrill Lynch's decision to be acquired by Bank of America, the gradual ebb of prime brokerage business away from the independents rose to a flood. APG, manager of Europe's biggest pension fund, said: "We have stopped stock lending in several American, but also European, banks whose shares face the most downward pressure, among others, from short-sellers." Read more...

Deutsche Prime Brokerage
Here is a collection of articles related to Deutsche Bank Prime Brokerage Services: Scores of big hedge funds have been shifting billions of dollars in prime brokerage business away from Morgan Stanley and Goldman Sachs to operations housed in large commercial banks, in what is being viewed as a massive flight to safety, write Greg Farrell and Henny Sender in New York . Traders at JPMorgan Chase, Citigroup, Deutsche Bank and Credit Suisse are among those who describe themselves as "inundated" with business from hedge fund managers moving their trading and execution away from the last two remaining independent investment banks. In recent weeks, prime brokerage business had been migrating away from Lehman Brothers, as the market perception of that firm began to worsen. But after Lehman's collapse into bankruptcy protection on Monday, along with Merrill Lynch's decision to be acquired by Bank of

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

109

The Prime Brokerage Book

America, the gradual ebb of prime brokerage business away from the independents rose to a flood. APG, manager of Europe's biggest pension fund, said: "We have stopped stock lending in several American, but also European, banks whose shares face the most downward pressure, among others, from short-sellers." Read more... Permanent Link: Deutsche Bank DB Prime Brokerage

Banc (Bank) of America Prime Brokerage
French financial services provider BNP Paribas has completed the acquisition of Bank of America's equity prime brokerage business, which provides services to hedge funds and mutual funds. The deal, announced on June 10, 2008, brings more than 500 clients and over 300 employees to BNP Paribas corporate and investment banking. The transaction also involves the transfer of client relationships, employees and technology systems. Yann Gerardin, global head of equity and commodity derivatives at BNP Paribas, said: "The strategic fit of this acquisition is excellent. Combining the Bank of America prime brokerage business with our global platform and leading derivatives business creates a prime brokerage business of choice. It is an important advantage for clients to partner with a bank like BNP Paribas, with an AA+ credit rating and global reach." Source [email protected]

INDUSTRY TERMS AND DEFINITIONS
Derivatives Prime Brokerage Prime brokerage clients often benefit from increased capital efficiency through margin netting of entire portfolios. Consolidated collateral
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 110

The Prime Brokerage Book

payment and one consistent valuation source provide operational efficiencies. Credit derivatives prime brokerage offers the capability to trade directly or on give-up across single name, index and correlation products-in all regions. The interest rate derivatives prime brokerage infrastructure allows clients to trade swap and derivative structures in many currencies.

Prime Brokerage Client Service With 24-hour global teams in place, clients benefit from the support and insight of experienced teams who provide innovative solutions based on an in-depth understanding of clients' objectives, operations, technology, data and accounting management. An experienced onboarder leads clients through the integration phase and directs a team of documentation, technology and operational professionals. And with a single point of contact and the full back up of a dedicated team, they deliver the highest level of service.

Hedge Fund Hotels 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. Space for Hedge Funds

Operational Support Operational Support for Hedge Funds Prime brokers act as a hedge fund's primary operations contact with all other broker dealers.

Global Custody Prime Brokerage Term
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 111

The Prime Brokerage Book

This service includes clearing, custody, and asset servicing Prime Brokerage Research Services Definition Prime brokers provide clients with timely daily morning research filtered for what they want from over various sources. The clients benefit by receiving access to conferences and research reports from institutions with which the prime brokers have relationships. The clients also benefit from receiving timely information throughout the day on securities and sectors of interest. Real Time P & L Through many prime brokerage technology systems, clients are able to enter trades as they are executed throughout the day as well as view resulting position and profit and loss changes in real-time. The application also pulls analytics from third party systems. Performance Analytics Risk Exposure, risk exposure management, management of risk exposure, risk exposure services by prime brokerage firms for hedge fund managers or hedge funds Risk Exposure Prime Brokerage firms provide clients with the flexibility required to manage overall risk exposure. Their system has the capacity to perform multiple customized and ad hoc analyses, including VaR, stress tests, sensitivities to multiple risk factors and ―on-the-fly‖ risk analyses of new portfolios. Data extracts and hardcopy reports, including those that demonstrate transparency to investors, feed directly into client systems.

Portfolio Analytics Prime brokers offer a comprehensive suite of applications to measure
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 112

The Prime Brokerage Book

risk, performance and P&L.

Hedge Fund Consulting Prime brokerage firms often offer 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, provide comprehensive business and technology consulting services for hedge funds of varying size and strategy. Recognizing the challenges associated with building an institutional funds management business, they constantly research new technologies and hedge fund services to provide effective solutions for their clients. Customized Technology & Reporting They provide hedge fund managers with portfolio reporting needed to effectively manage money. They provide robust, leading edge technology to meet the ever-changing needs of the clients. Through continued investment in technology, they provide clients with customized data delivery and reporting as well as end-to-end workflow solutions to deliver straight-through processing. This includes the following: An exhaustive set of financial reports including trades, positions, cash statements, flows, maturing deals, stock lending, risk exposure, corporate actions. A consolidated view of entire portfolio, gathering on the same reports cash, listed or OTC derivatives, for both equity and fixed income products, and including hybrid and structured instruments. A web-based solution, customizable to fit personal needs preset the user profile and choose their own daily set of reports, or filters, and the format of files.

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

113

The Prime Brokerage Book

Financing of Trades and Positions Prime brokers offer an effective framework to facilitate funding needs at highly competitive rates. They work closely with clients to better understand their financing needs and deliver tailored solutions. Financing facilitates leverage of client assets.

Risk Management Advisory Services The provision of risk analytic technology, sometimes supplemented by consulting by senior risk professionals. This includes Portfolio Risk Margining .They offer risk management expertise to tailor various margining methodologies to best suit clients' investment strategies and risk intolerance. As prime brokers, they can view a client's entire prime brokerage portfolio and optimize utilization of margin by recognizing off-setting positions to help manage risk. The capital efficiency gained allows clients to further enhance their investment returns Securities Lending Term Definition An important part of prime brokerage services is the ability of the prime broker to source stock in order to satisfy the short selling requirements of the fund. Many arbitrage strategies are dependent for their success on being able to source stock loan. The quality and depth of the stock lending service is therefore a key differentiating factor between prime brokers. They have access to hard-to-borrow securities

Capital Introduction Term Definition 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.

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

114

The Prime Brokerage Book

Additional Prime Brokerage Resources Below please find a collection of miscellaneous prime brokerage articles, resources and videos: Prime Brokerage Sales Capital Introduction Team What is Prime Brokerage? Prime Brokerage Products & Prime Brokerage Business Services Q & A Prime Brokers Association Research Services for Hedge Prime Brokerage New York Funds Lehman Prime Brokerage Prime Brokerage Business Unit Sold Information Asian Prime Broker Growth Independent Fund Prime Brokerage Book Administration Firms Prime Brokerage Service Hedge Fund Ethics | Code of Capital Introductions Ethics Prime Brokerage Technology Prime Broker Market Share & Prime Brokerage Clearance Clients Services Prime Brokerage For Small Capital Introduction Services Hedge Funds Prime Brokerage Services Hedge Fund Pitch Book | Prime Brokerage Consulting Marketing Prime Brokers Hedge Fund Service Provider Prime Brokerage Financing & Branding & PR Equity Services List of Hedge Funds | Prime Brokerage Clearance Directory of Contacts Services Lehman Brothers Bankruptcy San Francisco Hedge Fund and Hedge Fund Prime Event Brokerage Hedge Fund Transparency GLG Partners Exposure to Act Lehman Brothers Prime Brokerage Settlement Prime Brokerage Changes | Hedge Fund Risk Evolving Industry Management Lehman Bankruptcy Victims Where are Prime Brokers List Located Prime Brokerage Fees Capital Introduction Services Prime Brokerage Mergers & for Funds Acquisitions
PrimeBrokerageGuide.com PrimebrokerageAssociation.org 115

The Prime Brokerage Book

Margin Calls | Risk of Margin Calls with Frozen Accounts Hedge Fund Training Course Future of Prime Brokerage Industry Prime Brokerage Leverage Hedge Fund Blog Prime Brokerage Software Asian Hedge Funds & Prime Brokerage Services Prime Brokerage Sales Low Stock Market Trading Volumes Prime Brokerage OTC Derivative Arrangements Prime Brokerage Accounts Flowing in New Directions Interactive Brokers Trading Platform Financial Clearing and Execution Services from Prime Brokerage Services Top 3 Prime Brokerage Trends Switch Prime Brokerage Saratoga Prime Services List of Prime Brokerage Services Prime Brokerage Regulations Prime Brokerage & Hedge Funds Prime Brokerage & Hedge Fund Lawsuits Prime Brokerage Prime Broker List | List of Prime Brokers
PrimeBrokerageGuide.com

Firms Capital Introduction Definition Derivatives Prime Brokerage Precious Metals and Foreign Exchange Services Prime Brokerage Client Service Hedge Fund Hotels Hedge Fund Operational Support Prime Brokerage Global Custody Research Services for Hedge Funds P & L - Term Definition Performance Analytics Risk Exposure Management Portfolio Analytics Term Definition Customized Technology & Reporting Financing of Trades Term Definition Risk Management Advisory Services Securities Lending Term Definition Prime Brokerage Industry | PowerPoint Overview Gating Clauses and Lock Up Periods Prime Brokerage Agreement | Contract Example Not a Hedge Fund | No Prime Brokerage Services Prime Brokerage Business | Wikipedia
116

PrimebrokerageAssociation.org

The Prime Brokerage Book

Counterparty Risk Management Top 3 Technology Trends for Hedge Funds Adding a Second Prime Broker Prime Brokerage Training | Top Resources Prime Brokerage News Hedge Fund Manager Profiles

Precious Metals and Foreign Exchange Services Investment Conferences, Events & Seminars Prime Brokerage Conference Hedge Fund Business Consulting Risk Management Advisory Services

Prime Brokerage Trends Below please find all of the PrimeBrokerageGuide.com articles on industry trends, facts, statistics and surveys: Prime Brokerage Rankings Asian Prime Broker Growth Prime Brokerage Sales Trend New Prime Brokerage Model Emerging Prime Brokerage Trends Article Prime Broker Survey Results Prime Brokerage & Hedge Fund Administration Prime Brokerage for Small Funds Prime Brokerage Assets

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

117

The Prime Brokerage Book

Additional Websites & Resources
 http://PrimeBrokerageAssociation.org | Networking  http://PrimeBrokerageGuide.com | Prime Brokerage Guide  http://PrimeBrokerageBook.com | Prime Brokerage Book  Http://HedgeFundCertification.com | Certification & Training  http://FamilyOfficesGroup.com | Family Offices  http://HedgFundsCareer.com | Career Guidance  http://PrivateEquityBlogger.com | Private Equity

PrimeBrokerageGuide.com

PrimebrokerageAssociation.org

118

Sponsor Documents

Or use your account on DocShare.tips

Hide

Forgot your password?

Or register your new account on DocShare.tips

Hide

Lost your password? Please enter your email address. You will receive a link to create a new password.

Back to log-in

Close