What Is a Prime Brokerage?
A prime brokerage is a bundled group of services that investment banks and other financial institutions offer to hedge funds and other large investment clients that need to be able to borrow securities or cash in order to engage in netting to achieve absolute returns. The services provided under prime brokering include securities lending, leveraged trade executions, and cash management, among other things. Prime brokerage services are provided by most of the largest financial services firms, including Goldman Sachs, UBS, and Morgan Stanley and the inception of units offering such services traces back to the 1980s.
- Prime brokerage refers to a bundle of services that investment banks and other major financial institutions offer to hedge funds and similar clients.
- Services included within a prime brokerage bundle may include cash management, securities lending and more.
- The services of a prime brokerage aid hedge funds in accessing research, finding new investors, borrowing securities or cash and more.
Understanding Prime Brokerage
Prime brokerage services revolve around facilitating the multifaceted and active trading operations of large financial institutions, such as hedge funds. Central to their role, prime brokers allow hedge funds to borrow securities and increase their leverage, while also acting as an intermediary between hedge funds and counterparties such as pension funds and commercial banks.
Prime brokerages, at times referred to as prime brokers, are generally larger financial institutions that have dealings with other large institutions and hedge funds. As of 2018, for example, Morgan Stanley says its prime brokerage unit serves as a partner to more than 800 hedge funds and institutional clients. Though prime brokerages offer a large variety of services, a client is not required to take part in all of them and can have services performed by other institutions as they see fit.
Prime Brokerage Services
A prime brokerage offers a set of services to qualifying clients. The assigned broker, or brokers, may provide settlement agent services along with financing for leverage. Custody of assets may be offered, as well as daily preparations of account statements. Prime brokers offer a level of resources many institutions may not be able to have in house. In essence, a prime brokerage service gives large institutions a mechanism allowing them to outsource many of their investment activities and shift focus onto investment goals and strategy.
Concierge-style services may also be offered. These can include risk management, capital introduction, securities financing, and cash financing. Some go as far as to offer the opportunity to sublease office space and provide access to other facility-based benefits. As with more traditional offerings, participation in any of the concierge services is optional.
In cases of securities lending, collateral is often required by the prime brokerage. This allows it to minimize the risk it experiences as well as give it quicker access to funds if needed.
The majority of prime brokerage clients are made of large-scale investors and institutions. Money managers and hedge funds often meet the qualifications, as well as arbitrageurs and a variety of other professional investors. In the case of hedge funds, prime brokerage services are often considered significant in determining a fund's success.
Two common types of clients are pension funds, a form of institutional investor and commercial banks. These forms of investors often deal with a large amount of cash for investment but do not have the internal resources to manage the investments on their own.
The minimum account size to open and obtain prime brokerage account services is $500,000 in equity, however such an account is unlikely to get many benefits over and above what would be offered by discount brokers. For hedge funds or other institutional clients to get the kind of services that make having a prime brokerage account worthwhile (most notably discounted fees for trading), an account size of $50 million in equity is a likely starting point. Even so, these services are highly sought after by clients and the best banks only accept the clients that are most likely to be beneficial to them over time. For this reason a hedge fund would probably need to have as much as $200 million in equity in order to qualify for the best treatment.