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Primed for Change: Pershing's Messinger on an Industry in Flux

March 2, 2009

Pershing started its prime brokerage division in July 2007 at the tail end of the hedge fund heyday, when Wall Street's bulge-bracket firms typically had their pick of clients. But as a subsidiary of a custodian bank--Bank of New York Mellon Corp.--that avoided proprietary trading and derivatives, among other hazards, Pershing has seen the tide turn.

For hedge fund managers, the collapse of Bear Stearns in February made diversification a top priority. When Lehman Brothers declared bankruptcy in September, funds that held assets there, but also diversified, were rewarded for taking such precautions.

Prime brokerage leaders Goldman Sachs and Morgan Stanley may have faced the same fate as Lehman had the government not intervened. With their adoption of commercial bank charters, and Bear Stearns' acquisition by JP Morgan Chase & Co., all the biggest primes are now affiliated with banks.

Craig Messinger joined Pershing in 2005 as head of the clearing firm's global agency trading and principal trading activities. Two years later he was put in charge of the firm's nascent prime brokerage, Pershing Prime Services, which had signed on 20 clients as of February 2008--well before the market turbulence climaxed. More recently, says Messinger, the firm has gained eight to ten new customers a month.

In an interview with Securities Industry News correspondent John Hintze, Messinger, who previously spent nine years at Fidelity Capital Markets, where he led trading, execution, prime brokerage and stock loans, explained why Pershing's offering has become more attractive in the current market and how it fits with the prime brokerage industry's future.

How has Pershing Prime Services fared since the market turmoil began in September?

Over the last four to five months, we've added nearly 40 customers. Some have not fully come on board, but they've committed or are in the process of funding.

How big are they?

They cover the spectrum from very large firms with $1 billion in assets or more to midsize funds. Most are in long-short equity strategies, typically domestic, with a smattering of fixed-income and quantitative-strategy funds.

Why are they opting for Pershing?

One reason is the broader theme of diversification to more than one prime broker. Secondly, our combination of services and access to sources of liquidity, whether in the form of lending and borrowing securities, custody, reporting, etc. Thirdly, some firms are looking to put their long securities in a bank custody arrangement.

What are your criteria for new customers?

We look to work with hedge funds where we see a good match in terms of services and the alignment around appropriate leverage, strategies and product scope--where we can be a complementary partner.

Is size a factor?

It's more the segment of the markets funds participate in: U.S. versus international--and certain international [geographies] would be more complementary than others. We look for funds where our strengths complement their needs, and where we can grow our businesses together.

What are some of those strengths?