Prior to joining Cantor Fitzgerald, Yalmokas spent a large chunk of his working life in the equity derivatives, delta one, and stock lending businesses within prime brokerage at some of the leading players on the street. At Goldman Sachs – which Yalmokas joined shortly after the firm went public in 1999 – he spent five years building up the bank’s US equity financing and synthetic products operations within prime, before moving to UBS – where he was appointed head of US Delta One products and prime brokerage distribution and advisory. Most recently, he ran the American prime services business at the then newly merged Bank of America Merrill Lynch (BAML), helping the bank grow its hedge fund market share exponentially. “This was a period where we grew the BAML Prime balances five-fold and onboarded over 300 plus new clients before they decided to shrink it,” he says.
Joining Cantor Fitzgerald’s burgeoning prime brokerage arm after leaving BAML, Yalmokas has made huge in-roads expanding the firm’s hedge fund wallet share – especially among mid-tier managers. While Yalmokas concedes challenger primes such as Cantor Fitzgerald are not endowed with the balance sheet size of major banks – nor do they have such easy access to large pools of deposits – he notes they possess a level of flexibility which is alien to most large-scale financial institutions. This agility enables Cantor Fitzgerald to seamlessly unveil new products in a timely fashion – giving the organisation a strong competitive edge. “In the last few years, we launched equity prime, a SPAC (special purpose acquisition company) financing business, Delta One, fixed income repo and clearing, custody, rev-con trading, outsourced trading and an asset-backed commercial paper conduit business. To launch so many products at a major bank this quickly would have been nearly impossible,” he adds.
The other notable difference, he continues, between Cantor Fitzgerald and some of its larger peers lies with technology. “Banks are simply weak technology builders or managers, and their platforms have not changed much over the last few years,” he says. There are several reasons why banks are lagging behind on developing new technologies. Legacy systems and challenges in facilitating technology interoperability are often cited as being the biggest impediments precluding innovation at bank prime brokers, but Yalmokas is convinced that new regulatory IT costs and large, slow moving IT organisations are the main barriers. “A lot of the budget that primes would have nominally spent on research and development is being consumed by regulatory costs,” he says. Although Cantor Fitzgerald is subject to regulatory and ratings oversight, Yalmokas stresses the firm is encumbered by fewer regulatory costs than – say – a bulge bracket prime, which must adhere to strict Basel III requirements on capital adequacy and leverage ratios. This, he argues, means that providers such as Cantor Fitzgerald have been able to leapfrog the bank primes on technology development.
On the hedge fund client side, Yalmokas says the industry has become more mainstream since the 2008 crisis. What began as a niche, cottage asset class looking after the money of wealthy individuals, family offices and (the now largely defunct) funds of hedge funds is now firmly institutional, running in excess of $4 trillion on behalf of some of the largest pension funds, sovereign wealth funds, insurance companies and investment consultancies in the world. However, the crisis did expose a number of operational deficiencies at hedge funds, not least their failure to multi-prime. When Lehman Bros collapsed in September 2008, many hedge funds were left struggling to retrieve their trapped assets from the failed bank – a crisis which prompted many firms to diversify their counterparty risk. Whereas in the immediate aftermath of the crisis, hedge funds of all stripes – irrespective of AUM – appointed an arguably excessive number of primes, Yalmokas says the situation has calmed down with most managers now really using no more than three or four primes at a stretch.
Fourteen years later and despite hedge funds and prime brokers making countless adjustments to their risk management and governance processes, the Archegos family office blow up last year is resulting in another bout of soul-searching within the industry. After incurring eye-watering losses following their exposure to Archegos, two of the most adversely impacted banks in the whole saga opted to dismantle their prime brokerage arms, with Credit Suisse shuttering the business entirely and Nomura halting cash prime brokerage in the US and Europe. “Cantor Fitzgerald has benefited from these exits and is winning mandates from some former clients of these banks,” comments Yalmokas. Nonetheless, he reckons the fall-out will result in additional US regulations and oversight of some of the swap instruments responsible for Archegos’ demise. “Any regulation which brings about greater transparency into this part of the swaps market will be welcome,” he argues. However, Yalmokas doubts other banks will exit prime brokerage because of the perceived risks involved. In fact, he believes quite the opposite and is confident more banks will develop prime brokerage capabilities. “Any equities business that does not have a prime attached to it is only participating in half of the wallet. I expect some of the big Canadian, Asian or European banks will pivot into prime,” he notes.
Looking further afield, Yalmokas is especially bullish about the rapidly expanding crypto-fund market, an asset class which CoinShares estimates controls around $72.3 billion. A number of hedge funds are looking to diversify by launching crypto-funds with PwC estimating crypto-hedge funds managed $3.8 billion in 2020, up from $2 billion in 2019. “The market is already seeing the growth of Crypto-funds and tech providers to service them. I anticipate we will see more traditional providers partnering with crypto platforms and technology companies to support the growing Institutional demand,” he adds.