81,821
edits
Prime broker: Difference between revisions
Jump to navigation
Jump to search
no edit summary
Amwelladmin (talk | contribs) No edit summary |
Amwelladmin (talk | contribs) No edit summary |
||
| Line 1: | Line 1: | ||
{{anat|PB|}} | {{anat|PB|}}{{anat|brokerage|}}''This article is largely about equity [[prime brokerage]], because that’s mainly what the [[JC]] knows about.'' <br> | ||
{{anat|brokerage|}} | |||
A prime broker is the business division of an [[investment bank]] that looks after [[hedge fund]]s. | A prime broker is the business division of an [[investment bank]] that looks after [[hedge fund]]s. | ||
===What prime brokers do=== | ===What prime brokers do=== | ||
Prime brokers — fondly known in the trade as [[PB|PBs]] — | Prime brokers — fondly known in the trade as [[PB|PBs]] — provide the following services: | ||
*'''[[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 | *'''[[Bank account]]s''': running a multi-currency cash account - from which they can lend money. | ||
*'''[[Margin lending]]''': lending on margin to hedge | *'''[[Margin lending]]''': lending on margin to [[hedge fund]]s who want to own securities without paying for 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. | ||
*'''[[Swap]]s and {{tag|ETD}}''': Providing general exposure to swaps, futures, options and that sort of thing. | *'''[[Swap]]s and {{tag|ETD}}''': Providing general exposure to swaps, futures, options and that sort of thing. | ||
[[Prime broker]]s often also have a consulting arm which helps a nascent {{tag|hedge fund}}s get off the ground: setting it up, finding offices, hiring people, engaging lawyers, recommending (cough) [[prime broker]]s, and [[capital introduction]]. | [[Prime broker]]s often also have a consulting arm which helps a nascent {{tag|hedge fund}}s get off the ground: setting it up, finding offices, hiring people, engaging lawyers, recommending (cough) [[prime broker]]s, and [[capital introduction]]. | ||
===Why prime | ===Why [[prime broker]]s do it=== | ||
[[Prime brokerage]] is a ''financing'' business. This is the key to it: ''to [[lend]] your clients [[money]] so they can make investments. All going well the client keeps all the profits and losses from their investments, but pays you interest and repays your principal''. | |||
You can lend them [[money]] — ''explicitly'', through [[cash]] [[margin loan]]s, or ''implicitly'' through [[equity derivative]]s, and you can [[Securities lending|lend them securities]] so they can short-sell (also explicitly, through an outright [[stock loan]] or implicitly through [[equity derivative]]s). All this so your fund can generate — ahh — “[[alpha]]”<ref>Editor’s note: actually ''“[[vega]]”''.</ref> | |||
You make your money charging a financing rate to your clients on the money you lend them. the challenge is that your business will have to ''pay'' a financing rate, to your treasury department, for all the cash you are using in your business to lend to your customers. The trick is to organise your operation be as efficient as possible, to reduce that cost the treasury department charges you. The lower your cost of funding, the better your margins. | |||
How do you improve your cost of funding? By taking the assets you hold in your PB business (largely your clients’ [[custody asset]]s and your own hedge positions for your clients’ equity derivatives) and converting them into [[cash]], or cash-like instruments, that you can give back to your treasury department. | |||
===What prime brokers don’t do=== | ===What prime brokers don’t do=== | ||
*'''Act as {{tag|PB administrator}}''': While they look after assets, prime brokers don’t calculate {{tag|NAV}} (that’s the {{tag|PB administrator}}’s job) | *'''Act as {{tag|PB administrator}}''': While they look after assets, prime brokers don’t calculate {{tag|NAV}} (that’s the {{tag|PB administrator}}’s job) | ||