Prime Broking: In a turbulent time, consistency and breadth of offer are what count

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The prime broking industry is going through a turbulent time as some large providers have pulled out of the market following large and well-publicised losses. This has forced a growing number of fund managers to rethink their approach to prime broking. Rather than relying primarily on one big bank, an increasing number of funds are engaging with multiple prime brokers. They are also having to be more selective about which firms to consider, most notably by diversifying counterparties to include non bulge bracket providers. Concerned about the prospect of more upheaval in terms of who will remain committed to the market, they want to make sure they have stability, consistency and the full range of services they need to grow their businesses.

Against this backdrop, it’s worth considering some of the key drivers for fund managers that we’re likely to see in the coming months, both in terms of what asset managers need from their prime brokers, and how the industry is rising to the challenge. The latest Global Custodian Prime Brokerage Survey offers telling clues about where funds see value and how different prime brokerage providers are performing for their respective clients.

From Cowen’s perspective, the signs are encouraging. They also make sense, given what we know about recent industry events and market conditions. We see strengthening demand for those providers that offer the full spectrum of prime brokerage services and, most importantly, that have demonstrated a clear track record of solid performance and a consistent commitment to supporting their clients – as Cowen has demonstrated year in, year out.

The survey asks fund managers for their views about a wide range of the services they get from their prime brokers. From capital introduction to consulting to technology to offerings in different asset classes, the survey gives us an indication of which areas of activity they consider best-served and how that is changing over time.

The 2022 survey shows that the category where funds felt most satisfied was in trading and execution, with the highest average categorical score posted. The area where they were least satisfied was in capital introduction, consistent with clients’ historical perception of this service. In both cases – and, in fact, in the majority of areas polled – Cowen scored above the average score, and in several, well above the average. As important, we also showed year-to-year improvement in the scores we earned in 11 of the 13 service categories we were rated. Our overall total put us among the top 10 prime brokers for the fifth consecutive year. In fact, Cowen is one of only 6 prime brokers that have consistently ranked by Global Custodian over the last 11 years, and the only non-bulge bracket firm to do so. This is an achievement we’re particularly proud of, because it shows that we’re not just satisfying our clients, but that we’re doing so over the long haul.

Different requirements for different funds

Among the different categories in the Global Custodian report, some are particularly topical. Take risk management. Weak risk management practice is one of the main factors blamed for the spectacular losses generated by Archegos last year, and the ripple effects are still being felt.

The European Central Bank is the latest top authority to emphasise the need for sound risk management in the wake of the disaster, highlighting in a banking supervision report the tail risks that prime brokers face. Providers need the right tools and the right culture to mitigate such risks. At the same time, this was one of the categories where, in the 2022 Global Custodian report, fund managers showed relatively less satisfaction from their prime brokers. But here again, Cowen was among the top-performers. The proactive response we took to events in 2021, in terms of a client-focused approach to margin models, have clearly resonated with funds.

Ultimately, this is more of a whole-is-bigger-than-the-sum-of-its-parts story. Fund managers are grappling with rising market volatility and seismic shifts in the global economy. They have different needs depending on their profiles, but they also need prime brokers that will be able to handle their evolving requirements as they grow and shift their focus.

In the case of emerging funds, their needs could involve capital introduction or consulting. For established funds, they could involve service in a range of asset classes. For all funds, they need strong operational support, state-of-the-art technology and solid risk management. The point here is that there are only a limited number of prime brokers that can offer the full spectrum of services on a global basis and provide the level of high-touch customer service that many funds need.

More to the point, the number of providers is declining. The investment community will be finishing the year with fewer prime brokers than when it started. So, fund managers will need to be even more judicious than ever in choosing their stable of prime brokerage providers. We encourage people to look at the survey results in detail. We think they paint a very positive picture of our performance and highlight why we think Cowen can be a key partner for funds.

Highlights from the survey

  • Cowen recorded improved scores in 11 of 13 service categories in which we were rated. The most notable improvements were recorded in Fixed Income, Operations, Technology, Risk Management, and Trading and Execution.
  • Cowen outperformed the total survey scores in 11 of 13 service categories in which we were rated. The most notable outperformance came in Fixed Income, Operations, Listed Derivatives, and Trading and Execution.
  • Cowen has now ranked in the top-10 for 5 consecutive years, and is one of only 6 that’s been ranked by Global Custodian in each year for the past 11
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