The decision by several wholesale banks to exit the prime brokerage space for small and medium sized firms has paved the way for a new peer-to-peer model between asset managers and hedge funds.
Increased capital requirements, lower margins and growing concerns about a lack of profitability has prompted many banks, such as Goldman Sachs and Credit Suisse, to scale back their prime brokerage operations.
Most recently, J.P. Morgan announced it will exit the third party broker-dealer clearing and custody unit after a strategic review deemed it to be not a ‘core business’. In addition, HSBC said it will restructure its prime services management after the exit of Chris Barrow, the bank’s former global head of prime services sales.
“It is reflective in other areas in prime brokerage that the main banks are backing away from servicing small and medium sized firms,” says Johnathon Brewer, managing partner of hedge fund ISAM.
Following the exit of the main banks, ISAM announced this week it will launch a foreign-exchange brokerage service for institutional investors such as retail brokers, asset managers and hedge funds.
“We will definitely be targeting smaller sized hedge funds and asset managers for their FX prime brokerage business,” adds Brewer.
In addition to ISAM, BCS Prime Brokerage, the U.K. subsidiary of Russia’s largest broker, is also looking to fill the space.
“If you look at the prime brokerage space, the wholesale banks seem to be retreating further and further away from the small to medium-sized hedge funds, the benchmark requirements for assets under management seem to be increasing almost monthly at the moment,” says Tim Bevan, CEO, BCS Prime Brokerage. “So we do feel there is definitely a market there in terms of servicing and financing.”
The announcement of these intentions is the latest example in the rise of a peer-to-peer model, in which asset managers are increasingly filing the space left by the banks to provide prime brokerage and other financing services to other managers.
“I do see the peer-to-peer prime brokerage service as a long-term trend. It doesn’t make commercial sense for banks to have many very small clients,” says Brewer. “There are real operational benefits for a client to deal with us or one of our peers instead of going to the banks because they will be facing one counterparty rather than several. It is not just necessarily a question of if the banks were to come back into the market will firms in the peer-to- peer model automatically jump ship back to the banks; because they may worry those banks have similar strategic change in the future.”
However, many banks are remaining committed to the prime brokerage business for their bigger clients.
Banks Exit from Prime Brokerage Sees Rise of Peer-to-Peer Model
The decision by several wholesale banks to exit the prime brokerage space for small and medium sized firms has paved the way for a new peer-to-peer model between asset managers and hedge funds.