“If you look at the hedge fund industry as a whole its currently sitting at around $3.3 trillion assets under management with the expectation that it will hit $5 trillion by the year 2020,” said Topple.
“So there will still be growth in this space and prime brokerage continues to be a growing revenue pool in that it has seen growth since 2010 of around 8% which is higher than other areas of investment banking.”
As Global Custodian reported earlier this month, tier two prime brokers are winning a significant number of mandates from hedge funds which have been exited by bulge bracket primes.
Bill Stenning, managing director, clearing, regulatory and strategic affairs at Societe Generale, suggests that the market now faces considerable challenges.
“When thinking about what impact on prime brokerage in the future, what you can see is an increase in the level of sophistication,” said Stenning.
“From a client perspective, you’re going to have to change how you interact with your prime broker and understand the impact your business has on your prime broker’s capital ratios in order to be efficient, which will mean having a different relationship going forward.
“This increased level of sophistication alongside the general direction and quantity of regulation is serving to increase the barriers to entry in prime brokerage.”
In addition to increased regulatory challenges, a 2015 Ernst & Young survey revealed that 41% of distressed debt hedge funds and 32% of fixed income and credit managers said their prime brokerage fees had increased.
In spite of challenges, Topple says that prime brokerage remains an attractive proposition.
“The appetite is still there and it would be wrong to suggest people are pulling out of prime brokerage.
“With all the changes that are happening it needs to be more focused and more tightly managed but there are still good margins and it is still a good business to be in.”