Prime Brokers Set Their Sights Overseas

Jun 18 2008 | 2:00am ET

As the never-ending quest for alpha leads more and more hedge funds to cast their nets abroad, an increasing number of firms are setting up overseas offices—a trend that has not been overlooked by the service providers supporting them.

FINalternatives Prime Brokerage 2008FINalternatives Prime Brokerage 2008The globalization of hedge funds is forcing prime brokers to broaden their own service offerings, resulting in a race among prime brokerages to build up their international services in order to win the business of the hedge fund industry’s largest firms. In particular, prime brokers have focused on expanding their services in Asia ex-Japan, emerging Europe and Latin America.

According to a recent study by the TABB Group, 68% of hedge funds are planning to invest in Asia ex-Japan in 2008, while 36% plan to invest in emerging Europe and 32% in Latin America. Hedge funds’ interest in overseas markets is nothing new, but weak returns in the U.S. over the last year have fueled a search for alpha abroad. According to TABB, at least 400 overseas hedge fund offices are expected to be opened in 2008, with another 400 or so likely next year.

“Asia ex-Japan is a big place of movement at the moment,” says TABB analyst Monica Schulz. “And interest is not only because of attractive listings in the country, but because of its increased electronic market structure.”

India and Malaysia have recently opened up to direct market access, creating new opportunities for statistical arbitrage funds. To accommodate this interest, Schulz says the major prime brokers have been quick to offer connectivity. And when it comes to efforts to differentiate themselves from their competitors, she says prime brokers are concentrating on bolstering their client services—everything from marketing and support to prompt response times, technology and capital introduction.

“In the U.S., hedge funds seem to be skeptical of some of the services prime brokerages offer and realize that capital introduction is something that they need to take on themselves,” says Schulz. In fact, according to the 2008 FINalternatives Prime Brokerage Survey, 38% of hedge funds rated their prime broker’s capital introduction services as “poor.”

“But abroad, it is a service that is of a little bit more value,” adds Schulz. “Overseas sales and marketing are very important because the stamping is often pretty low when offices are opened abroad, so capital introductions are important.”

In particular, TABB found that the biggest difficulties hedge funds experience when opening up overseas offices are a dearth of marketing expertise, differing regulatory requirements, data quality and establishing local broker relationships. For prime brokers looking to win overseas business, these findings are essentially a checklist of how to win business abroad.

by Britt Erica Tunick

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

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