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Sell Side Pours Dollars Into Capacity, Connectivity | Market Data Needed--And Faster, Please | Hedge Fund Asset-Class Demands Raise Stakes for Servicers | SIA, BMA Quiet About Merger; Some Open Questions Remain | Matching People and Technology | Elsewhere in Town: Thain, Nazareth at the Big Board's Regulatory Show | Business Is Looking Up, Vendors Act Accordingly | Sybase: Can Breadth Trump Specialization? | Platform's Latest Version Goes Real-Time | Intel: Wanting to Be Noticed--Up to a Point | Smart Searches Find Their Way to Wall Street | Asset Manager Ixis Using Pyxis' mWholesaler | Vendors Combine Real-Time and Historical Analytics | Bracing for MiFID
Hedge Fund Asset-Class Demands Raise Stakes for Servicers
June 19, 2006
There was a time, not so long ago, when providing clearing, settlement and custody for investment assets, regardless of where a client executed its trades, was enough to call a service "prime brokerage" and keep the rich fees rolling in. No longer.
In their constant quest for the absolute returns known as alpha, hedge funds are demanding access to an ever-growing smorgasbord of asset classes. That demand means that prime brokers will provide a host of new products and services, often lucrative ones. It also means devoting time and resources to expanding their platforms to accommodate the new business, causing some competitors to fall behind.
The most obvious indication of the challenge faced by prime brokers is the gobs of money they are spending to beef up their offerings. Prime brokers spent $900 million on technology in 2005, and that will grow to more than $1 billion by 2008, estimates Needham, Mass. market research firm TowerGroup. Much of that is slated to bolster traditional clearing, settlement and custody capabilities to handle the new asset classes springing up around the world and to provide readier access to those asset classes at home, especially the ability to trade seamlessly from one asset to the next.
Prime brokers are also seeking to improve the support they provide, and they now offer business consulting, portfolio reporting, margin loans and securities lending. Those services become even more complicated to provide in a cross-asset-class investment world, which appears to be the driving trend today.
Multi-asset-class funds are "probably about 10 percent of the marketplace, but that's certainly the fastest-growing segment," says TowerGroup analyst Matt Nelson. "The strategy is very appealing from a manager's perspective; it goes back to the entrepreneurial spirit these guys have."
It's not just the biggest hedge funds that are pursuing the multi-asset-class trading strategies. "We have a client that's only managing $50 million and is looking at three investment strategies: options, futures and stocks," says Nitin Gambhir, CEO of Tethys Technology in New York, provider of a hosted trading and portfolio management platform that is one of several available multi-asset-class front-end systems. Competing vendors include Calypso Technology of San Francisco, Murex of Paris, and the Front Arena unit of SunGard Data Systems, Wayne, Pa. Each have struck partnerships with prime brokers. Bear Stearns & Co., for one, offers clients connectivity to several trading systems, including Tethys, Lake Forest, Calif.-based FutureTrade and Chicago-based LiquidPoint's Heat platform, as well as third-party systems from the likes of RiskMetrics Group and Imagine Software, both of New York.
The biggest prime brokers--Bear, Goldman
Sachs & Co. and Morgan Stanley are the big three--strike such
deals to avoid having to develop the technology themselves. Goldman
stepped into the execution arena more aggressively than most six
years ago when it acquired Spear Leeds & Kellogg, owner of the
Redibook direct-market access platform. In many cases, though,
prime brokers have chosen to develop connectivity to vendors of
their clients' choice. "We've created custom connectivity so that
before the hedge fund managers arrive in the office, all their
positions, activities and data are integrated into the desktop,"
says Ron Suber, a San Francisco-based senior managing director and
manager of prime brokerage sales for Bear Stearns.
