Big banks want more bang for their buck from hedge fund clients. Rather than trying to pull in as many clients as possible, they are putting pressure on hedge funds to give them more profitable business and to change the way they trade.
When accountancy firm EY published its 10th annual global hedge fund and investor survey in November, 60% of hedge fund managers said their prime brokers had asked for “fundamental alterations” to their relationship to make it economically viable, including increasing trade allocation and making changes to treasury management.
“We continue to witness a trend of prime brokers re-evaluating the types of business they do and the managers with whom they are willing to do business,” EY said.
Whether to grow or cut back prime brokerage activities, in which banks provide leverage and trading services to hedge funds, has been a big question for firms in recent years. The answer has largely depended on the size of the investment banks.
George Kuznetsov, head of research and analytics at research firm Coalition, said: “The trouble for prime [brokers] started when the (leverage ratio rules) were introduced because prime does use a lot of balance sheet. The banks started thinking about optimising their prime market share and thinking a little bit more about how they look at prime from a slightly different angle.”
Jonathan Cossey, co-head of prime finance at JP Morgan, said that his goal was to gain market share but not at the expense of profitability. The US bank has increased its prime services revenue in Europe, the Middle East and Africa by 40% this year, Cossey said, mainly by boosting the number of clients and types of work it does for them, but also by slimming down some of the less profitable offerings.
“We have strong aspirations to get to No. 1 in Europe but by profitability not size,” Cossey said. "Funds that may be good for one bank may not always be the right fit for another bank."
Joseph Leckie, head of sales and marketing in HSBC´s prime finance division for Europe, the Middle East and Africa, said the bank was trying to have conversations with hedge funds that make their relationships “more transparent” and help “manage expectations on both sides”.
The head of prime brokerage at a US bank said that his team had become pickier about what types of business it took on: “What one prime broker may find interesting, another may not. It depends on what you currently have on your books.”
"Funds that may be good for one bank may not always be the right fit for another bank"
In certain circumstances, banks are ditching some clients altogether. Credit Suisse has pared back its number of prime brokerage clients in recent years after it reviewed the productivity of its hedge fund clients in 2015, according to a person familiar with the matter. But the bank is still keen to keep hold of and cross-sell services to its profitable hedge fund clients, saying in November that it was reallocating some of its balance sheet to key customers.
Hedge funds, in turn, have responded by getting more pragmatic about who they work with and increasing the number of prime brokers on their rosters. Around a quarter of hedge funds used three or more prime brokers in 2016, compared to one-fifth in 2014, according to Preqin.
Larger hedge funds are also getting savvier about managing their prime broker relationship. One head of capital introduction at a bank said that mega hedge-fund managers generally would hold informal reviews of their prime broking relationships every six months, looking at rates and ranking the prime brokerages on the quality of services.
One reason hedge funds may be increasing the number of prime brokerages they work with is their concern about the safety of some banks.
Coalition´s Kuznetsov said that prime brokerage relationships were typically “sticky”, but had a tendency to shift around if hedge funds were worried about a particular firm’s standing, which meant firms could find opportunities for growth in times of banking stress. “The clients are becoming much more concerned and move their money at a much higher speed if they are worried about the counterparty risk,” Kuznetsov added.
In September it was reported that a number of hedge funds, including AQR Capital, Citadel and Millennium Management, had taken steps to transfer some of their financing arrangements, accounts and trading from Deutsche Bank to other counterparties due to concerns about the German bank´s capital safety.
Still, any up and comers will have to prove that they understand the needs of new clients. In EY´s survey, most investors said they would be less likely to invest in a fund that used a niche prime broker rather than an established, top-tier name.
Más información: https://www.fnlondon.com/articles/banks-want-quality-not-quantity-from-hedge-funds-20170105
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