Tony Griffiths

17/08/2011 Author: Tony Griffiths

Managers are striking a multi-prime balance

When the 2008 crash hit, equally volatile and abrupt was the managerial response to the nature of their service provider relationships. Multi-prime and independent administration came in and the number of commitments went through the roof. The scaling back of service provider relationships, as volatility later dampened, has been similarly dramatic. Now, the pendulum is finally beginning to settle.

The obvious example of relationship number management is the prime brokerage industry. The single-prime model is dead, but so, it seems, is the immediate post-crisis commitment to large multiples.  

“Nowadays, managers are looking for two or three prime brokers,” says Stephen Foster, COO of single manager and funds of hedge funds at Credit Suisse. “It seems to me they prefer to have a traditional US broker dealer-type relationship and a relationship with a prime broker backed by a strong, well-funded European bank. After that, a manager might choose a third with either a specialist in the market they’re in or with someone with whom they have an existing relationship.”

One UK-based manager with over $500m in AuM told HFMWeek that three is the magic number. The majority of their fund’s business is spread across two, with a third as back-up. Not unlike a spare tyre – unused but invaluable.        
Another factor in scaling back has been driven by the prime brokers themselves. Although “a lot more competitive on rates for the more liquid assets,” as Foster says, they expect more in return. “If you want to get good service from your prime brokers you’ve got to be an important client. And if you’re spreading your business too thinly, you won’t be.”

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