Hedge Fund News From HedgeCo.Net


Changing the Prime Brokerage Pricing Landscape

West Palm Beach (HedgeCo.net) – An editorial by Evan Rapoport, Co-Founder of HedgeCo Networks.

Currently, and over the past nine years, I have been selling Prime Brokerage for almost all the major Mini-Primes and some of the largest Prime Brokerage houses.  I did not however work for these firms directly, nor did I ‘sell’ in the traditional sense.  My role instead is one a consultant.   I make introductions to what I believe is the right Prime Broker based upon the client’s needs, even if I have no economic benefit in doing so.   In addition, I am most often able to actually lower commission cost of the client and get the value-added services that enhance their Prime Brokerage relationship to a level they have not experienced previously.  That said, I have made hundreds of introductions to Primes and Mini-Primes and have brought in over a billion dollars of assets that have been held custody and traded with Prime Brokers.

As a result of my experience as a prime brokerage consultant, I have become quite good at understanding the strengths and weaknesses of the various Prime Brokers, especially the mini-Prime Brokers in the industry.  Some can have great prices, others great software or research, better execution platforms, robust reporting, fixed connectivity, faster co-location, soft dollar administration, capital introduction, stock loan, bond desks, international equity offerings, better financing costs, enhanced leverage, futures, currencies, the list goes on and on and on.  Point is, choosing a Prime Broker can be much more difficult than just figuring out who can give you the lowest commission rate. A wrong move could cost you more than thousands or millions in commissions, it could inhibit you from growing your fund and firm to the appropriate levels.

However, with all the above in mind, there is a large percentage of hedge funds that are long/short equity or options strategies that simply use a screen to execute their transactions.  These funds may not utilize any of the afore mentioned services or even care about them, outside of having a good order management system (OMS) and a safe, high quality custodian for their fund assets.  These types of traders can be the most commission sensitive, and turn over their portfolio the most often.  For these traders, every fraction of a penny matters.  So if the service was the same, and the custodian was the same, and the platform was the same, why would a hedge fund pay .01c if they could pay . 005 or .003?  The reason are plentiful, frankly, and include:

  • Inability to negotiate properly with their Prime or executing broker because of their lack of industry knowledge (ie: where the industry is priced currently for their size, volume, etc.)
  • Insecurity about upsetting the relationship with their current Prime or executing broker.
  • Feeling they may lose potential value added service they currently enjoy
  • Laziness

There is no reason a fund has to be overpaying for a service that has been commoditized like screen-based trading, and I spend a good deal of my day re-working potential clients Prime Brokerage or straight execution arrangements in efforts to save them and their investors as much as possible. This is especially easy when you are moving a client from one brokerage firm that uses XYZ for custody, to another brokerage firm that also has a clearing relationship with XYZ.  They both have the same OMS, same reporting, etc.; usually the only difference is usually cost.  What continues to surprise me is how even some of the largest hedge funds still don’t pay as low of a price as they could be paying. Their posture possibly attributed to what was mentioned in the bullets above.

So all of this got me thinking, “What if there was a place where fund managers and traders could go to simply name the price they wanted to pay, detail the services needed, and see if there were any takers?” In a tough economy where brokerage firms are fighting for execution business, and fund managers have been put in the driver’s seat, they need to be able to seize the opportunity.   But what vehicle? And how would they drive it?  That is why I, and my team, came up with ThePrimeline.com.

Shameless pitch below:

ThePrimeline.com is the first service available to the hedge fund and trading community where customers can name the price they would like to pay for execution.  ThePrimeLine.com utilizes a multi-factor comparison algorithm to find the perfect match between prime brokers and investment Managers. By working with the information submitted by the investment manager, coupled with internal data and research, the HedgeCo Securities team suggests a list of prime brokers relevant to the hedge fund or manager.

Utilizing ThePrimeline.com may allow hedge funds and traders to anonymously shop their prime brokerage and execution needs and ultimately bring down their pricing without any sacrifice in quality.  That was my goal in creating this site. I truly hope if your firm is one that can benefit from the site, that you take advantage of the opportunity to potentially decrease your costs and improve your returns.

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