Hedge Funds Get Satisfaction From Their Primes

Jun 17 2008 | 2:00am ET

A successful working relationship between prime brokers and investment funds is vital to the profitability of both parties. Funds and prime brokers rely on each other’s business, with prime brokers providing such mission-critical services as execution, custody and clearing, while funds provide prime brokers with deal flow resulting in revenue. 

FINalternatives Prime Brokerage 2008FINalternatives Prime Brokerage 2008The FINalternatives 2008 Prime Brokerage survey polled hedge fund and CTA managers about key aspects of their relationships with their prime brokers. Overall, 65% of the responding fund managers are satisfied with their prime brokers and do not intend to change firms in the near future. 

The key factor underpinning hedge fund manager satisfaction with their prime brokers is service, with competency coming a close second. Poor personal service is single most significant reason that funds decide to switch to another prime broker. While only 12% of funds rank their prime brokers as being “poor” in delivering personal service, 73% of dissatisfied funds are looking to change prime brokers. By comparison, out of just 7% of prime brokers that received “poor” marks on cost, only 38% have clients ready to leave. Among the features defining sound personal service is “unparalleled responsiveness.” On the other end of the spectrum, some firms report that their prime broker’s sales person “is not knowledgeable, is weak in follow-up, and over-promises and under-delivers.”

This year, 63% of fund managers say their prime brokers are either “good” or “excellent” in personal service. This number, however large, represents a decline in satisfaction from a year ago when 80% of funds gave their prime brokers either “good” or “excellent” marks on personal service in the FINalternatives survey. The drop in satisfaction with personal service may be due to last year’s turbulence in the industry: 16% of fund managers say that the liquidity crisis has worsened their relationships with their prime brokers.

A surprisingly large proportion of respondents, 51%, rate their prime broker either “good” or “excellent” on cost, signaling that many prime brokers continue to deliver great value to their clients. This number too, however, has declined from last year, when 70% gave high marks for cost. This may be due, however, to market conditions, as last year most funds were able to absorb higher costs and still generate significant profits. 

Capital introduction capabilities of prime brokers received the lowest marks this year: 38% of respondents rate their prime brokers as “poor” performers in the capital introduction space. While a few fund managers acknowledge that the fundraising environment is tough due to the financial crisis, several note that their prime brokers’ capital introduction function is often non-existent.

Another issue considered in this year’s survey is electronic execution. Of the respondents, an unexpectedly large proportion, 30%, characterize their electronic platform needs as “advanced,” while another 60% characterize those needs as “middle-of-the-road.” Technology-savvy funds are the most satisfied customers as far as electronic execution is concerned: out of those funds that say there are “advanced” in the technology space, 81% rate their prime broker’s electronic execution services as either being “good” or “excellent.” One in every three fund managers also indicates that his prime broker’s electronic platform has improved over the last year.

The results of this year’s survey underscore a more somber mood amid fund managers and their perceptions of their prime services providers. Given the roller-coaster ride of the economy, however, prime brokers appear to be holding up their service standards quite well. While prime brokers continue to provide indispensable and well-appreciated functionality to fund managers, differentiation of their brands is important and can be a challenge. “Brokers all deliver the same platform,” says one respondent. “At the end of the day, it’s all about the quality of the service representative. If she is great, the prime broker looks great.”

by Irene Aldridge

This article appeared in the June 2008 edition of
FINalternatives Prime Brokerage.

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