27 September 2021
Prime brokers are a vital aspect of the global market architecture. Prime brokerage services facilitate large, active and complex trading operations. They provide services to hedge funds among other clients and co-ordinate extensive trading in various financial instruments.
Prime brokerage services encompass a variety of financial services to their clients. They frequently act as intermediaries between hedge funds and two of their key counterparties. One of these counterparties is large institutional investors, including pension funds who manage vast equity holdings. The scale of these holdings means that they can act as a lending source for short-selling.
Commercial banks with significant enough funds to make large amounts available for margin purposes are the second group of counterparties. The prime brokerage brings these institutions together with hedge funds to help facilitate large scale short selling. This is done by borrowing stocks and bonds from institutional investors and increasing their leverage by margin financing from the banks.
In return, the prime brokers will charge a fee for facilitating the transaction. This might be in the form of a spread or a premium on the loan made available from a commercial bank.
Prime brokers also provide trade and clearing settlement services to their clients. A hedge fund will operate through numerous accounts at different brokerage firms but usually, instruct them to clear any trades via its chosen prime brokerage. This simplifies the whole process, as the prime broker usually provides custodian services for the hedge fund’s assets. This facilitates the swift movement of funds, streamlining the entire process.
Prime brokers provide their hedge fund clients with a range of other services that help to simplify and streamline how the hedge fund operates. This might be in the form of detailed data, performance and risk analysis aiding decision making.
A vital service played by prime brokerage providers is that of capital introductions. This is where they link hedge fund managers to possible investors. These will usually be institutions with whom the prime broker already has a client relationship. They may also offer their clients access to their derivatives trading desks.
Hedge funds play an essential role in the prime broker business model, but they are not their only clients. There is a range of other large investment clients that need clearing services. If they need to borrow cash or securities to facilitate trading, they will also need prime brokerage services. These clients could include inter-deal brokers, mutual fund and market maker firms.
Prime brokers provide a range of vital services to their clients, all of which can impact overall profitability. With that in mind, careful consideration needs to be given to the choice of the prime broker. Price is a factor, but not the only one.
The prime broker should also provide access to large volumes of securities holders, including those who hold less liquid and less readily available securities. High levels of confidentiality should be guaranteed.
GIS HK provides prime brokerage services across Asia-Pacific. We aim to fill a gap in the market, offering alternative prime brokerage solutions for individuals and businesses that larger institutions and other prime brokers currently neglect. We have both the flexibility and experience to make a difference.