[ I N D E P T H | P R I M E B R O K E R A G E ]
market occurrences had noticeably hindered the prime business . The ‘ one thing after another ’ era was a thorn in the side for a segment that is particularly sensitive to market forces impacting its clients ’ appetites for lending and other prime services . But the headwinds have subsided , and the tailwinds have finally arrived in the form of new fund launches , a rise in allocations and increasing returns for funds , not to mention the continuing emergence of multi-strategy hedge funds . Prime brokerage is an industry which thrives off its clients ’ growth , and that ’ s exactly what we ’ re seeing now .
“ Year-to-date , we ' re seeing for the first time in many years a notable uptick in new fund launches and spin outs from bigger places ,” says Jack Seibald , managing director , co-head of Marex prime services and outsourced trading . “ Within that , there ' s more billion-dollar and above launches in the last twelve months than there were in the preceding several years . That ' s adding a level of interest in the sector again by allocators . From our cap intro team , we ' re certainly seeing from the allocator community renewed interest in hedge funds .”
According to Coalition Greenwich , the top dozen investment banks offering prime services saw revenues rise to a record $ 20.4 billion in 2023 . Meanwhile , with regards to equities , revenue deriving from prime brokerage compared to trading shifted from a 30 % versus 70 % ratio a decade ago , to 40 % to 60 % in 2023 .
Dominic Rieb-Smith , managing director , international head , prime services sales , JP Morgan , refers to the past year as “ a standout ”. Meanwhile , Patrick Travers , head of distribution at Clear Street ,
says he agrees with the sentiment around it being a good 12 months for prime brokers : “ From our perspective , the markets have remained strong with pockets of volatility which tend to allow for investment opportunities and increased balance activities which are key drivers across the equity finance landscape .”
In addition to the billion dollar-plus launches , CIBC Mellon also points out to us the noteworthy increase in scheduled fund launches with assets under management of $ 500 million or greater - up almost two-fold on what was observed in 2023 .
Penny Novick , global co-head of prime brokerage at Morgan Stanley , picks up on this point , stating : “ With heightened dispersion across equity markets , hedge funds continue to see strong opportunities to generate alpha globally , which has led to increased levels of gross exposure being deployed across the fundamental long /
“ Year-to-date , we ' re seeing for the first time in many years a notable uptick in new fund launches and spin outs from bigger places .”
JACK SEIBALD , MANAGING DIRECTOR , CO-HEAD , MAREX PRIME SERVICES AND OUTSOURCED
TRADING short universe .
“ Additionally , multi-manager hedge funds have continued to win the lion ’ s share of the new capital coming into the industry as they have been rewarded for their ability to mitigate risk while still delivering positive alpha to their investors . The positive performance combined with markets trading at all-time highs and elevated gross leverage across the hedge fund client base has meant prime brokerage balances have reached peak levels .
“ Views from the allocator universe towards the broader hedge fund industry also remain positive , and while this hasn ’ t necessarily led to net inflows to the industry as a whole up to this point , the forward-looking expectations based on our recent Investor Survey would point to increased allocations to hedge funds in the next 6-12 months , which we expect will also have a positive impact on the prime brokerage business .”
We spoke to around a dozen primes across this feature , and anecdotally , there were also countless examples of growth , including – but not limited to – an uptick in growth in Europe , something backed up by a recent IFR article titled ‘ Europe ’ s hedge fund industry is taking off after lost decade ’, while there was also
64 // TheTRADE // Q3 2024