Prime brokers are the designation given to individuals handling a package of services offered by investment banks, wealth management firms, and securities dealers to hedge funds which need the ability to borrow securities and cash in order to be able to invest on a netted basis and achieve an absolute return.
There are two types of prime brokers - bank and non-bank corporations.
Traditionally major global investment banks have been the predominant players in the space, however recent years have proven that there is space for non-bank liquidity providers that sometimes can deliver a better service than traditional financial institutions.
Prime brokers are earning on commissions, spreads and overnight margin lending.
Brokers which are operating STP flows in sufficient size are the main contenders to have a direct relationship with a prime broker, while smaller firms are relying on prime of primes to access a pool of prime brokers.
What Roles Do Prime Brokers Perform?
Prime brokers are responsible for a wide range of services, which typically include global custody such as clearing, custody, and asset servicing.
Additionally, these individuals are also tasked with securities lending and financing, in a bid to facilitate leverage of client assets.
The individuals can also provide hedge fund managers with portfolio reporting needed to effectively manage money as well as operational support.
Prime brokers act as a hedge fund's primary operations contact with all other broker dealers.
Finally, many prime brokers also look to provide additional value-added services, such as risk management and capital introduction.
Of note, larger prime brokerage firms today usually monitor the risk within client portfolios through house-designed risk-based margin methodologies.
These are helpful in considering the worst-case loss of a portfolio based on liquidity, concentration, ownership, macroeconomic, investing strategies, and other risks of the portfolio.