Hedge funds are subjecting their prime brokers to ever higher levels of scrutiny. Paul Kelly, CEO of Linear Investments looks at what prime brokers need to do if they are to attract more mandates moving forward.
Speciality prime brokers are playing an increasingly instrumental role in supporting small to mid-sized hedge funds. Linear Investments looks at some of the reasons behind why these primes are now thriving.
SME hedge funds poised to rally
During bouts of market volatility, institutional investors might have a bias towards larger hedge funds, as they are often considered to be lower risk and more stable. Despite this, SME (small to medium sized) hedge funds are still very well positioned to navigate the current headwinds, as their nimbleness and size enables them to target specific return opportunities in less liquid or niche corners of the market.
This makes SME hedge funds an optional investment proposition for yield-hungry institutions.
Nonetheless, SME hedge funds do face extensive challenges, insofar as many are dealing with rising operational costs and the influx of new regulations. These obstacles can sometimes be a distraction for managers, especially when launching new funds or during the early stages of raising investor capital.
Specialist prime brokers make a play
It is here where smaller – I need to look through that a specialist prime brokers – offering full service capabilities (i.e. cash and synthetic) prime brokerage, stock loan/lending, repo and margin financing, custody and clearing, can make a material difference.
Increasingly, hedge funds of all sizes are leveraging these primes, following concerns that certain tier one banks may not be as committed to the business as they once were. This comes after some larger banks have closed prime brokerage arms, while others have markedly scaled back or shuttered their offerings.
Although a number of tier one banks still offer prime brokerage, very few are willing to actually work with SME hedge funds. In the rare instances where tier one providers do support SME hedge funds, the level of service managers receive is usually fairly low, at least relative to their larger peers.
In contrast, speciality primes adopt a high-touch model, and work closely with SME hedge funds to help them reduce initial set-up costs and operational expenses, enabling them to focus on business growth and return generation. For example, providers such as Linear Investments offer custody, clearing and financing services with a global network of partners, which allows clients to reap cost savings due to Linear’s access to preferable terms.
Whereas tier one banks are often saddled with legacy technology and processes which can impede their ability to respond to client demands, speciality prime brokers are able to continuously innovate and launch new products quickly. Such agility is invaluable when working with a diverse range of SME hedge funds.
Similarly, capital introductions facilitated by boutique primes are tailored according to their clients’ bespoke needs, which can help boost managers’ chances of fundraising success.
Set up to succeed
SME hedge funds are operating in a tough market environment, but it is not an impossible one. By working with specialist prime brokers – who prioritise customer service – SME firms can net a number of strategic and operational benefits, enabling them to concentrate their energies on revenue-making activities.
Linear Investments LTD is authorised and regulated by the Financial Conduct Authority (“FCA”) FRN 537389. Linear is incorporated in England and Wales, registered no: 07330725. The value of investments, and the income from them, can go down as well as up.