11 October 2021
Prime broker services are a vital aspect of the global trading infrastructure. They help make trades happen, remove some barriers to trade execution, and simplify what can be a complex process.
If a hedge fund wishes to place a trade order, they will contact their prime broker. These days, this will usually be done online, but trades can still be initiated via telephone. It's the prime broker who will take responsibility for clearing the trade.
A prime brokerage acts as a central broker who facilitates and coordinates complex and extensive trading operations across a range of financial instruments. Major investment banks provide large scale prime brokerage services to significant global players such as Goldman Sachs and Merrill Lynch.
A hedge fund manager will usually trade with several different brokers. The prime broker for the fund will provide a consolidation service. In practice, this means that executing brokers will be instructed to settle all of their trades with the prime broker. Because all the crucial information is in one place, it makes reporting much more streamlined and straightforward.
Prime brokers work to provide a wide variety of financial services to hedge funds and other clients, in effect acting as a crucial intermediary between the hedge funds and two of their significant counterparties.
Large institutional investors, such as pension funds, are the first counterparty. These will usually have substantial equity holdings and are a realistic source of securities to help finance short-selling. The second set of counterparties are commercial banks with considerable funds to draw upon to make available for significant loans for margin purposes.
The prime broker makes money by charging a fee, which could be in the form of a spread or premium on the loan from a commercial bank, for bringing these parties together to facilitate a particular transaction.
Besides facilitating trading opportunities, prime brokers also provide their hedge fund clients with a range of additional back-office services designed to make it easier for the hedge fund to operate.
A critical service they provide is the provision of detailed risk and performance analytics. This helps inform investment and strategic decision-making at the hedge fund, giving managers crucial information to help them improve the overall performance of the fund.
In a similar vein, prime brokers will usually provide their hedge fund clients private access to the prime broker’s research services. This is highly valuable and helps widen the information that a hedge fund manager has access to while driving down research costs for the fund.
Many prime brokerages will also provide a range of other administrative, support and trustee services. They will also provide high-level investment advice. For this reason, prime broker services will usually employ highly experienced professionals with a wide range of contacts, depth of knowledge and a proven track record of success.
As the prime broker market becomes increasingly competitive, the importance of the right personnel has grown even further.
Global Investment Strategy offers prime brokerage services to our growing list of international clients. Our dedicated trading desk is open across global trading hours, giving our clients unrivalled market access. Our team at Global Investment Strategy has over a century of combined tier-1 financial institution experience, giving us the skills and depth of knowledge to add value to your investments.