Global prime brokerage revenues sink
26 September 2013 New York
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A report stated that global prime brokerage revenues in 2012 were estimated at $12 billion, down from $15 billion in 2008.
Because there are more active firms gathering market share today, revenues at individual firms may have decreased more than the aggregate figure suggests, the report added.
The 2012/2013 report from Ernst & Young also found that hedge funds are continuing to diversify their prime broker exposure in order to reduce their counterparty risk.
“The collapse of several firms during the financial crisis, which accounted for a large share of the prime brokerage business, demonstrated the need for funds to spread their risk.”
In 2006, the top two prime brokers, Goldman Sachs and Morgan Stanley, accounted for 52 percent of hedge fund assets.
In 2012, they accounted for less than 33 percent.
Key findings of the publication included client acceptance—it was found that most brokers have a formal acceptance process for new clients. Client onboarding and monitoring was also examined, with the survey shows that prime brokers can potentially gain advantages by introducing better technology into the onboarding process.
Less than half—44 percent—of firms use a semi-automated process for capturing data and tracking onboarding progress and completion.
Another discovery was around organisational structure. Only one prime broker surveyed separates itself as a standalone, separate and distinct business unit. The others work in the same silos that affect the business, such as securities lending, FX and OTC clearing. Securities lending desks usually report to prime brokerage, but serve other businesses as well. All the prime brokers have dedicated sales and account management teams.
“Cost cutting, tighter capital and leverage requirements, more demanding clients and the paucity of client profitability measures are all real challenges for prime brokers that want to respond effectively to changes in the hedge fund industry,” concluded the report.
“To meet these challenges requires prime brokers to be able to ascertain each client relationship’s profitability. For this, they need an understanding of the cost of the operational services that the broker provides the client. This understanding will allow a firm to tier its clients effectively, thereby choosing the most appropriate fee to charge.”
Because there are more active firms gathering market share today, revenues at individual firms may have decreased more than the aggregate figure suggests, the report added.
The 2012/2013 report from Ernst & Young also found that hedge funds are continuing to diversify their prime broker exposure in order to reduce their counterparty risk.
“The collapse of several firms during the financial crisis, which accounted for a large share of the prime brokerage business, demonstrated the need for funds to spread their risk.”
In 2006, the top two prime brokers, Goldman Sachs and Morgan Stanley, accounted for 52 percent of hedge fund assets.
In 2012, they accounted for less than 33 percent.
Key findings of the publication included client acceptance—it was found that most brokers have a formal acceptance process for new clients. Client onboarding and monitoring was also examined, with the survey shows that prime brokers can potentially gain advantages by introducing better technology into the onboarding process.
Less than half—44 percent—of firms use a semi-automated process for capturing data and tracking onboarding progress and completion.
Another discovery was around organisational structure. Only one prime broker surveyed separates itself as a standalone, separate and distinct business unit. The others work in the same silos that affect the business, such as securities lending, FX and OTC clearing. Securities lending desks usually report to prime brokerage, but serve other businesses as well. All the prime brokers have dedicated sales and account management teams.
“Cost cutting, tighter capital and leverage requirements, more demanding clients and the paucity of client profitability measures are all real challenges for prime brokers that want to respond effectively to changes in the hedge fund industry,” concluded the report.
“To meet these challenges requires prime brokers to be able to ascertain each client relationship’s profitability. For this, they need an understanding of the cost of the operational services that the broker provides the client. This understanding will allow a firm to tier its clients effectively, thereby choosing the most appropriate fee to charge.”
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