Are we on the cusp of another prime brokerage reckoning?

• Insights
• Prime Brokers

Contingency planning and risk management are being taken more seriously than ever before by hedge funds and their clients, especially following the decision by several banks to call time on their prime brokerage operations.

Will they stay, or will they go now?

During this period of geopolitical unrest, investors are scrutinising hedge funds in more depth on how they manage their service provider relationships, and their approaches to contingency planning and risk management.

Primes have come under the spotlight, in the aftermath of the collapse of the highly leveraged Archegos family office in 2021.  The failure of Archegos saw a number of banks with exposures to Archegos incurring steep multi billion dollar losses, while several banks chose to shut down their prime brokerage businesses altogether.

In addition to Credit Suisse who exited prime brokerage completely, Japanese bank Nomura which had the second biggest exposure to the defunct family office after Credit Suisse, stopped offering cash prime broking in the US and Europe also in 2021.

While the events at Archegos never threatened the solvency of its prime brokerage partners, it did force managers and investors to think more carefully about the reputational risks of being involved with certain providers.

It also highlighted the importance of contingency planning.

While Credit Suisse had an agreement with BNP Paribas to refer hedge fund business to the French bank post Archegos, managers should remember that not all prime brokerage exits will be this orderly.

While these events took place some time ago, they are still front of mind in the investment community when reviewing outsourced partners. Large scale failure is not something that is easily forgotten.

Choosing a prime partner in the current landscape

Selecting a prime with a reputation for building strong client relations and focused on risk management, especially in today’s  turbulent markets, is absolutely integral.

Although Credit Suisse had long jettisoned its prime brokerage operations by the time of its eventual collapse, the Swiss bank’s fire-sale to UBS earlier this year was a stark reminder to many hedge funds that TBTF institutions are not immune from failure.

In this highly competitive market environment, hedge funds should place emphasis on working with primes who not only prioritise transparent communication with clients but also understanding on the effects of market disruptions and have built robust contingency plans. Without this level of focus primes may will reduce their opportunities to win business.

Our ability to have a personal relationship with our clients enables us to have a greater and deeper understanding of our clients’ trading needs, investment strategy and pain points within their operational requirements. We invest significant resources and time in these relationships, enabling us to provide the best client experience possible.

The growing number of small and medium-sized hedge funds, who aren’t large enough to meet the criteria of being a standalone client at a major investment bank, can be assured that Linear is well placed to support their needs as they scale as a business.