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Shifting Prime Relationships Burden Smaller Funds

March 2, 2009
By John Hintze

"They're not going to make prime brokerage a loss leader for their other businesses," said Stern. "But if the firm had a profitability hurdle to pass if we were only a prime brokerage client, then they would probably give us a bit of a discount if we were profitable in other parts of the firm."

That change is significant, said Stern, considering the competition for profits that had existed between a large broker's various desks. It is also a more effective way to draw business at a time when belts are being tightened. And with hedge funds' increasing adoption of multi-prime strategies, capturing a fund's other types of business has become even more important. AM Investment not only has several primes, but two for each account. "After a year like last year," observed Stern, "you have to continuously assess your counterparties, and you may have to make dramatic decisions to move balances to protect investors' assets."

As is to be expected, prime brokers are paring their services and staff to adjust to the reduction in revenues. GMI's Ahmad said services such as capital introduction are still available at the big primes, but those groups are thinner, perhaps because their focus on funds that are already large makes finding new capital less urgent. And ancillary offerings like conferences have mostly been eliminated, said Ahmad.

Although GMI is a relatively small fund, it opened up a second prime brokerage account in January at Newedge. While the Paris-based firm's prime unit is far from the largest, it offers one feature that eludes even Goldman Sachs. "There's an implicit state guarantee with Newedge that we don't have with GS," Ahmad said. "They only came out of their nationalized state a short while ago, the government still owns a substantial part of their equity, and Sarkozy is standing behind them."