Charting New Territory: The Future of Hedge Fund Prime Brokerage

Hedgeweek published the second in a series of in-depth Insight Reports, ‘Charting New Territory: The Future of Hedge Fund Prime Brokerage’, at the end of February.

Cowen supported the report – with commentary from Jack Seibald, Managing Director and Global Co-head of Prime Brokerage and Outsourced Trading at Cowen, and other thought leaders – and the subsequent webinar, which was moderated by Chris Elliott, Head of Europe Prime Brokerage Business Development.

Key Findings

PBs’ activities face closer scrutiny following Archegos losses

The GameStop ‘meme stock’ short squeeze and the rapid implosion of Archegos Capital Management has upended the hedge fund prime brokerage space over the past year, with a number of PBs exiting the market, putting leverage models, transparency and risk limits firmly on the agenda among managers, primes and regulators.

“Being a relatively nimble organisation allows you to address crises quickly when they arrive. During the ‘meme stock’ saga, for example, we were quick to act in a manner that protected our clients as well as our balance sheet,” said Jack Seibald, managing director and global co-head of prime brokerage and outsourced trading at Cowen.

The new landscape is ripe with opportunities – and challenges

As hedge fund performance rebounds, and assets under management soar to record highs, prime brokers are well-placed to capitalize on the industry’s recent positive momentum. But amid the dominance of the so-called ‘Big Three’, the increasing quantitative, complex, multi-asset nature of the industry poses scalability challenges for some smaller PBs.

Virtual networking is now an established part of cap intro services

The Covid-19 pandemic saw capital introduction services pivot to the virtual landscape. Digital events are now here to stay, offering time and cost efficiencies to managers – but in-person events remain vital when it comes to building lucrative relationships.

Evolving market dynamics are reshaping primes’ product offering and hiring process

New trends spanning technology, data, digital assets and ESG are transforming the way hedge fund firms invest and operate, and prime brokers are increasingly alive to how the business is evolving. Smaller and more boutique outfits can carve out specialist niches in burgeoning sectors, asset classes and geographies.

“While they certainly don’t have the balance sheets that the bulge bracket firms do, in terms of capabilities they can certainly be considered reasonably credible alternatives or a complement. In more and more instances, we’re being looked at as an incremental prime solution, where funds are growing and they need to diversify their counterparty risk. And so rather than going to yet another bulge bracket firm, they are adding a firm a Cowen to their stable,” Jack says.

PB selection is now more important than ever for new and start-up funds

Prime broker selection is more important than ever for start-up hedge funds and emerging managers in the process of launching, with services such as cap intro and consulting marketing the difference between success and failure.