Prime Brokerage

Prime Brokerage

What is a Prime Brokerage?

A preferred brokerage is a group of bundled services that investment banks and other financial institutions provide to hedge funds and other large investment clients who must be able to borrow securities or cash in order to engage in compensation to obtain absolute returns. The services provided within the framework of privileged brokerage include, among others, securities lending, financial leverage and cash management. The main brokerage services are provided by most of the largest financial services companies, including Goldman Sachs, UBS and Morgan Stanley, and the creation of units offering such services dates back to the 1980s.

Key points to remember

  • Preferred brokerage refers to a set of services that investment banks and other large financial institutions offer to hedge funds and similar clients.
  • The services included in a preferred brokerage group can include cash management, securities lending and more.
  • The services of a prime broker help hedge funds access research, find new investors, borrow securities or money, and more.


Prime Brokerage

Understanding Prime Brokerage

Preferred brokerage services revolve around facilitating the multifaceted and active trading operations of large financial institutions, such as hedge funds. At the heart of their role, prime brokers allow hedge funds to borrow securities and increase their leverage, while playing the role of intermediary between hedge funds and their counterparties such as pension funds and commercial banks.

Preferred brokerages, sometimes called prime brokers, are generally larger financial institutions that deal with other large institutions and hedge funds. In 2020, for example, Morgan Stanley stated that its main brokerage unit served as a partner for more than 800 hedge funds and institutional clients. Although first-rate brokerages offer a wide variety of services, a client is not required to participate in all of them and may have the services performed by other institutions as they see fit.

Preferred brokerage services

A privileged brokerage offers a set of services to eligible clients. The designated broker (s) may provide settlement agent services as well as leverage financing. Custody of assets can be offered, as well as the daily preparation of account statements. Prime brokers offer a level of resources that many institutions may not have in-house. Essentially, a preferred brokerage service provides large institutions with a mechanism to outsource many of their investment activities and to focus on investment objectives and strategy.

Concierge services can also be offered. These can include risk management, capital introduction, securities financing and cash financing. Some even offer the possibility of subletting offices and providing access to other facilities-related benefits. As with more traditional offers, participation in one of the concierge services is optional.

In the case of securities lending, collateral is often required by the prime broker. This allows him to minimize the risks he faces and give him faster access to funds if necessary.

Eligible customers

The majority of the brokerage’s main clients are made up of large-scale investors and institutions. Fund managers and hedge funds often qualify, as well as arbitrators and a variety of other professional investors. In the case of hedge funds, preferred brokerage services are often considered important in determining the success of a fund.

The two most common types of clients are pension funds, a form of institutional investor, and commercial banks. These forms of investors often process a large amount of cash for investment but do not have the internal resources to manage the investments by themselves.

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