18/08/2010 Author: Tony Griffiths

The HFMWeek European Prime Brokerage Survey

Highlights and analysis from HFM's report on the prime brokerage landscape

It has been a time of change and growth for the prime brokerage industry. The post-Lehman landscape – no longer so dramatically dominated by the historic duopoly of Morgan Stanley and Goldman Sachs –
is one that has had to adapt and mature in order to keep up with the tenor of new financial times. Multi-prime, custodial services and a re-evaluation of client communications have topped a new list of manager requirements, giving prime brokers plenty of food for thought. Have these new demands been met? To find out, HFMWeek undertook a comprehensive survey of managers, rating each prime broker out of 7 (with 1 being poor and 7 equating to excellent) across a range of ten categories. The top-ten rated services, in ascending order, are listed below.

10 CAP INTRO
Perhaps a reflection of a wider disappointment with the barren asset-raising environment in general, but capital introductions proved the runaway loser with survey participants. The service was the only one of the ten to earn a sub-4 average – rating it as ‘weak’ overall – and trailed behind ninth place by almost an entire point. As well as providing every single prime with their worst individual score, cap intro also has the dubious honour of being the only category in the entire survey in which a sub-3 average was recorded; one prime scoring 2.9. An honourable mention should go to Newedge however – the only prime to score a 4-plus average in what was, clearly, a very unforgiving group. Aptly, this emerging force in prime brokerage also won the cap intro award at HFMWeek’s 2010 service provider awards.      

9 CONSULTING
If, until recently, the prime brokerage space has been on a well-documented hiring spree, consulting is one area in which all primes have increased their numbers. The expanding range of concerns post-Lehman have been key drivers here, emerging regulatory and operational matters in particular, and while the survey’s consulting average is relatively high (satisfactory-to-good), the wide spread of individual scores suggests that there is still room for improvement. Several primes rated ‘weak’ – a score between 3 and 4 – while a similar number posted scores in the ‘satisfactory’ and ‘good’ categories. Special mention goes to Newedge, Credit Suisse and Goldman Sachs for particularly strong showings in this group, all three with scores over 5.   

8 COST AND VALUE FOR MONEY
Faced with reduced revenue and client withdrawals in recent months, prime brokers have increased fees, especially in financing. However, with competition heating up, value-added services have also been on the rise. Though cost and value for money was ranked only eighth on the list, the satisfactory-to-good average, as well as the tight spread of results, suggests most primes have maintained value for money at a time when overheads have been hit hard. Particular mention goes to SEB, Morgan Stanley, Goldman Sachs and Credit Suisse, all of whom scored strongly in this category. However, while nine out of the ten primes received ratings of 4 or higher, one had an average that sees it languish in the weak-rated (3) category. Cause for concern, no doubt.   

7 TECHNOLOGY
In the post-Lehman drive for multi-prime, information is king. Investors want multiple relationships and a more thorough, timely and frequent understanding of them. These new challenges could not be met without a greater focus on technology. Some primes have historical excellence in the field (Morgan Stanley being a notable example, with a survey score reflecting that fact) while others have inherited strong technological platforms, such as Barclays Capital (not included in the survey), which acquired Lehman’s respected quants desk. Either way, every prime has had to adapt, and quickly with it, and, as our survey results suggest, the majority are keeping up. This was another group with a tight spread of scores, with only one prime broker averaging less than 4, and even that was by a whisker.

6 OPERATIONS
Defined as the day-to-day running of the fund, and requiring the reconciliation of multiple systems, the scope of operations has changed in recent months. Prime brokers are now more prepared to deal with smaller funds, and, not only that, but to tailor their services to smaller clients – a practice relatively unheard of pre-crisis. Survey participants seem to be appreciating this wider access to bespoke offerings, with every prime’s overall average well above the 4 mark, or ‘satisfactory’. However, although Operations is one of several groups with a tight spread of results, two prime brokers stood out: The averages for both Morgan Stanley and Goldman Sachs in this category were among the top-ten for the entire survey. 

5 FINANCING
Leverage, bridge loans and cash management – financing remains an integral part of the prime brokerage package. Borrowing levels have been on a generalised ascent in recent months, and when the choppy May/June period caused them to dip and caution to rise, it only increased the demand for cash holdings. As a category, financing provides yet another tight spread of results, suggesting participants are satisfied with the industry’s overall level of service. The majority of primes scored between 4.5 and 5, with one falling just below this range. A special mention goes to Morgan Stanley and Goldman Sachs, the only two to breach the 5-point barrier, with one doing so by a substantial margin.

4 REPORTING
The timeliness and accuracy of reporting has been under the spotlight for months, as managers react to calls from regulators and investors alike for greater depth of detail. Increasingly challenging as this may be, prime brokers appear to be meeting expectations, with survey participants elevating the category into the top four. Goldman Sachs topped the group, and did so with the second-highest average in the entire survey, a score well above 5.5. The spread of results, however, was relatively wide, from almost 6, down to one prime whose score only just saw it reach the ‘satisfactory’ (4) bracket. Overall, this was a group in which the highest scores were assigned to the historical names.   

3 CUSTODIAL SERVICES
Along with multi-prime, custodial services have been at the heart of the post-Lehman prime brokerage revolution. The in-house custody model – which created a rush for the exits during the crisis – has been replaced by a range of external solutions, the most prominent of these being the tri-party model. Deutsche Bank and Goldman Sachs have joined forces with Bank of New York Mellon to offer clients an independently managed custodian, with other primes moving in a similar direction. The top-three placing suggests that managers have given the industry the thumbs up to its response, scoring custodial services highly across the board and granting Credit Suisse, Deutsche Bank and UBS their highest scores of the entire survey.

2 SECURITIES LENDING
With an overall average barely distinguishable from that awarded to custodial services, securities lending scrapes into second place with another strong, all-round performance. The high placing is perhaps even more impressive when considering the innovation within the custody space and the well-documented rise in the price of securities lending. This was also one of only two groups in which five primes breached the five-point mark, the other being, once again, custodial services. Special mention here goes to Merrill Lynch, JP Morgan and SEB, all of whom recorded their highest scores for the survey in this category – with SEB doing so by a significant distance. As with all the categories, Goldman – which continues to retain a degree of hegemony in the space – also performed very well.

1 CLIENT SERVICE AND COMMUNICATION
A real problem in the aftermath of the Lehman collapse with many managers complaining of feeling abandoned by their primes, client service and communication was once considered the industry’s Achilles’ heel. In fact, many hedge funds complained of a degree of arrogance from their primes before the crisis. Not anymore. The category’s top placing in the HFMWeek survey – a victory that saw it as the only service to record an overall average above 5 – caps an impressive turnaround and should be considered a significant achievement for the industry in general. It was Goldman Sachs that polled highest in this group, providing the survey’s highest individual average in the process, although all primes scored highly, with only one recording an average less than 4.5. The prime brokerage industry can now put any accusations of arrogance firmly behind it and build on what is, evidently, a strong foundation for further development. 

For more information
All data contained in this article has been extracted from the HFMWeek European Hedge Fund Services: Prime Brokerage Survey. To receive a more detailed version of the research, including a breakdown of results by prime broker, please contact James Blanche on +44 (0)20 70294051 or j.blanche@pageantmedia.com.