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*'''[[Custody]]''': looking after the {{tag|hedge fund}}’s “long” investment portfolio - (but this is because they like to [[reuse]] all those lovely assets) | *'''[[Custody]]''': looking after the {{tag|hedge fund}}’s “long” investment portfolio - (but this is because they like to [[reuse]] all those lovely assets) | ||
*'''Bank accounts''': running a multicurrency cash account - from which they can lend money. | *'''Bank accounts''': running a multicurrency cash account - from which they can lend money. | ||
*'''[[Margin lending]]''': lending on margin to hedge funds who want to buy securities without funding them (you know - [[leverage]]). | |||
*'''[[Stock lending]]''': lending the {{tag|hedge fund}} the assets it needs to settle [[short sale]]s, and lending it the money it needs to buy assets. | *'''[[Stock lending]]''': lending the {{tag|hedge fund}} the assets it needs to settle [[short sale]]s, and lending it the money it needs to buy assets. | ||
*'''[[Synthetic prime brokerage]]''':providing the {{tag|hedge fund}} with [[derivative]] exposure to assets as an alternative to the [[hedge fund]] buying them outright). Often in the trade called “[[CFD]]”s. This may involve accepting [[give-up]]s from other [[executing broker]]s. | *'''[[Synthetic prime brokerage]]''':providing the {{tag|hedge fund}} with [[derivative]] exposure to assets as an alternative to the [[hedge fund]] buying them outright). Often in the trade called “[[CFD]]”s. This may involve accepting [[give-up]]s from other [[executing broker]]s. | ||
Revision as of 12:06, 10 April 2019
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Hedge Funds & Prime Brokerage Anatomy™
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Brokerage Anatomy™
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A prime broker is the business division of an investment bank that looks after hedge funds.
What prime brokers do
Prime brokers — fondly known in the trade as PBs — usually provide the following services:
- Custody: looking after the hedge fund’s “long” investment portfolio - (but this is because they like to reuse all those lovely assets)
- Bank accounts: running a multicurrency cash account - from which they can lend money.
- Margin lending: lending on margin to hedge funds who want to buy securities without funding them (you know - leverage).
- Stock lending: lending the hedge fund the assets it needs to settle short sales, and lending it the money it needs to buy assets.
- Synthetic prime brokerage:providing the hedge fund with derivative exposure to assets as an alternative to the hedge fund buying them outright). Often in the trade called “CFD”s. This may involve accepting give-ups from other executing brokers.
- Swaps and ETD: Providing general exposure to swaps, futures, options and that sort of thing.
Prime brokers often also have a consulting arm which helps a nascent hedge funds get off the ground: setting it up, finding offices, hiring people, engaging lawyers, recommending (cough) prime brokers, and capital introduction.
Why prime brokers do it
What prime brokers don’t do
- Act as PB administrator: While they look after assets, prime brokers don’t calculate NAV (that’s the PB administrator’s job)
- Act as depositary: PBs, which tend to be situated in London, or New York, generally cannot act an official depositary for AIFMD purposes (though they may get delegated the safekeeping role and may act as a depo-lite)
- Act as an executing broker: They don’t themselves work equity orders for their clients (though their compadres across the Chinese wall in the equities trading division at the same investment bank almost certainly will)
Not to be confused with
See especially in the context of AIFMD: Prime broker - AIFMD Provision.