Wall Street and Technology – Big changes are afoot in the prime brokerage world. Once an esoteric business controlled by three players—Morgan Stanley, Bear Stearns and Goldman Sachs—it has become ahotbed of competition as rival banks and brokers have sought to profit from the hedge fund explosion.

But it is not merely growth in assets under management and the number of hedge funds that is prompting change. Market maturity—specifically the institutionalization of the investor universe and heightened regulation—means hedge funds are facing demands for better risk analysis, performance measurement and reporting; more robust operational infrastructures; and greater transparency. And all of this is reflected in the demands placed on prime brokers.

Of particular note is the drive toward more transparency across the brokerage industry as a whole, which is resulting in a new level of openness in the costs associated with the services provided by the prime brokers, says Sang Lee, managing partner with Aite Group, a Boston-based research and advisory firm. With hedge funds under pressure from their clients to optimize their broker relationships, managers increasingly are scrutinizing the services and products they receive from their primes, adds Lee. As they see exactly what they are being charged for, “They will be able to pick on an à la carte basis what services to get from what providers, and that, in turn, can only present more opportunities for entrants to the marketplace.”

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