Prime Broker 2016

HFMWEEK SPECIAL REPORT PRIME BROKER 2016

REGULATION Adhering to increasingly stricter developments VULNERABILITY Self-evaluation proves critical INNOVATION Capitalising on an evolving market

FEATURING: ABN AMRO Clearing // Cowen Prime Services // Global Prime Partners // Interactive Brokers // Invast Global THE ALTERNATIVE PRIME BROKER

We are NOT a bank We are a FULL-SERVICE prime broker We value ALL of our clients

We give clients a high-touch and ﬂ exible alternative to the traditional, bulge bracket prime brokers. We off er bespoke solutions and quick to market account opening. This is why we’ve won the HFM Week Award for “Best Boutique Prime Broker” for ﬁ ve years in a row.

To see how we can add value to your business, visit our website globalprimepartners.com, email [email protected] or call +44 (0) 20 7399 9450

FOR PROFESSIONAL CLIENTS ONLY. NOT FOR USE FOR RETAIL CLIENTS. This is not a solicitation of any off er of service to US Persons. Any services described are not intended for US persons. Global Prime Partners Ltd. 4th Floor, 7 Old Park Lane, London W1K 1QR. Company number 06962351. Authorised and regulated by the Financial Conduct Authority No. 533039 and by the Hong Kong Securities and Futures Commission. PRIME BROKER 2016 INTRODUCTION

espite regulatory requirements weighing heavy on the prime brokerage sector and talk of larger PBs cutting back on their books, there are still plenty of options D available for astute managers. Global regulations such as Basel III have forced numerous prime brokers to reassess their book of hedge fund clients. But this trend has also provided space for non-bank providers to flourish as innovative managers embrace the shifting environment. While splitting from a prime broker may be inevitable in some scenarios, being caught off guard is not. Evaluating vulnerability can prove to be vital as correctly reading the warning signs may not act as a cure, but could significantly help in moving forward quickly. Through in-depth analysis and expert perspective, this HFMWeek Prime Broker Report 2016 aims to provide a snapshot of current thinking across the sector.

Tom Simpson Report editor

REPORT EDITOR Tom Simpson T: +44 (0)207 832 6535 [email protected] HFMWEEK HEAD OF CONTENT Paul McMillan T: +1 646 891 2118 [email protected] HEAD OF PRODUCTION Claudia Honerjager SUB-EDITORS Luke Tuchscherer, Alice Burton, Charlotte Romeyer ASSOCIATE PUBLISHER Lucy Churchill T: +44 Published by Pageant Media Ltd (0)20 7832 6615 [email protected] PUBLISHING ACCOUNT MANAGERS Alex Roper T: +44 (0)207 832 6594 LONDON [email protected]; David Butroid +44 (0)207 832 6613 [email protected]; Alexandra Bethanis T +44 Third Floor, Thavies Inn House, (0) 20 7832 6618 [email protected]; Andrew Durbidge +44 (0)207 832 6637 [email protected], 3-4 Holborn Circus, London, EC1N 2HA THE MEMBERSHIP TEAM +44 (0)20 7832 6511 [email protected] CIRCULATION MANAGER Fay Oborne T +44 (0) 20 7832 6500 T: +44 (0)20 7832 6524 [email protected] CEO Charlie Kerr NEW YORK 200 Park Avenue South Suite 1603, NY 10003 HFMWeek is published weekly by Pageant Media Ltd ISSN 1748-5894 Printed by The Manson Group T +1 646 891 2110 © 2016 all rights reserved. No part of this publication may be reproduced or used without the prior permission from the publisher

HFMWEEK.COM 3 PRIME BROKER 2016 CONTENTS

FUND SERVICES FUND SERVICES 06 LEVERAGING EFFICIENCY TO GIVE NEWER 11 TIME TO EMBRACE CHANGE FUNDS A LEG UP Nick Briscoe of Invast Global speaks about the dangers of Gildas Le Treut of ABN AMRO Clearing talks about the complacency and details his beginnings in the industry current market challenges for managers and prime brokers alike FUND SERVICES 14 BREAKING UP IS HARD TO DO FUND MANAGEMENT Global Prime Partners investigate the stages of a prime 08 WHERE HAVE ALL OF THE PRIME BROKERS broker split and how best to deal with the aftermath GONE? Interactive Brokers investigate where all of the prime FUND SERVICES 16 brokers have gone and why many are charging higher fees HEDGE FUND HEADWINDS: than ever before PERFORMANCE IS THE SOLUTION Jack Seibald of Cowen Prime Services discusses how the industry must move on from the turbulence experienced in recent times

4 HFMWEEK.COM Interactive Brokers FOR HEDGE FUNDS

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Interactive Brokers LLC is a member NYSE, FINRA and SIPC. Hedge Funds are highly speculative and investors may lose their entire investment. Supporting documentation for any claims and statistical information will be provided upon request. [1] According to the Barron’s 2016 online broker review. [2] Based on independent measurements by the Transaction Auditing Group, Inc., (TAG). For additional information see, ibkr.com/info

09-IB16-1004CH992 PRIME BROKER 2016

LEVERAGING EFFICIENCY TO GIVE NEWER FUNDS A LEG UP GILDAS LE TREUT OF ABN AMRO CLEARING TALKS ABOUT THE CURRENT MARKET CHALLENGES FOR MANAGERS AND PRIME BROKERS ALIKE

he measure of intelligence is the ability to FIGHTING YOUR CORNER change,” Albert Einstein apparently once Today, investors need returns and so hedge funds have said. And change is what the hedge fund a rare second chance to stage a comeback. Obviously industry and its service providers have not every structure and not every strategy, but any been trying to deal with since the financial area that can achieve the return requirement outcome crisis. investors seek needs to be supported. “TGoing forward it will be interesting to observe The argument that smaller managers can add re- which intelligent solutions prime brokers can come turns still holds, either because they are more nimble up with to help their clients grow and prosper in an or because they can allocate appropriate amounts to environment with increased regulation and continued size sensitive strategies. According to research pub- low interest rates, where cash and other collateral on lished last year by City University London - Sir John deposit tend to cost money. In fact, for a €10 million Cass Business School – a hedge fund with £200m in deposit overnight clients will find themselves paying assets could on average outperform a £5bn hedge fund for the privilege. by 125 basis points a year and a £1bn fund by 61 basis None of this is new, and much has already been points. written about the impact of Basel III’s capital require- The authors also found that other things equal, in- ments, the Central Counterparty Clearing for FX vestors would have been better off with smaller hedge and equity securities financing. funds than with large ones dur- These environmental changes ing the crisis periods. But that is forced some of the larger banks only if these smaller managers to revisit ‘uneconomical’ prime can get financing at a reasonable brokerage and custodial ac- rate, otherwise gains get wiped counts as they look to optimise TODAY, INVESTORS NEED out in costs. So what options to their balance sheets. smaller managers have if the big RETURNS AND SO HEDGE banks are shedding their smaller THE FACTS or less profitable accounts? According to HFMWeek in FUNDS HAVE A RARE The last couple of years have April 2016, top custodians and seen the rise of two alternatives: prime brokers shed 1,000 clients SECOND CHANCE TO STAGE technology driven mini-prime in 2015. Depending on their brokers with limited balance own capital ratio constraints, A COMEBACK sheet, focusing on smaller man- individual prime brokers have agers and expert prime brokers reacted to different clients in servicing specialised strate- different ways. This was largely gies. Due to its tradition in post Gildas Le Treut is dependent on how the funds’ strategies affect the” trading, ABN AMRO Clearing has been able to offer global director of prime bank’s balance sheet and how these impact the overall clients prime brokerage and custody services which clearing at ABN AMRO return on equity. leverages their derivatives clearing expertise and fi- Clearing, a leading provider Yet it would seem few of the larger banks have nancing capacity for quantitative and arbitrage strate- of equity and derivatives stopped to look at the longer term implications of cut- gies. clearing services. He is ting off the oxygen supply to smaller, newer managers. globally responsible for From the point of view of the end investor, this current WE’RE HERE TO HELP the management and situation suggests that they may find themselves only ABN AMRO Clearing has built its prime brokerage development of prime left with the larger hedge funds to allocate to. business around certain selective strategies where it services to institutional This is fine if performance is strong. Cyclicality in as- can offer financing in combination with an unmatched investors and alternatives set management suggests the larger the funds, the more correlation haircut model, as well as global market ac- investment managers, with likely that performance eventually fails (and so fees cess and wide product coverage. Capital efficiency, a specific focus on arbitrage will not be justified). If this is correct, then closure or by managing collateral from a central point and being strategies, relative value, redemptions are more likely to follow. Could the shut- able to offer execution (via Global Execution Servic- equity L/S and CTA. down of Perry Partners flagship fund after 28 years and es), custody and clearing and financing, are some of peak assets of $15 billion be a sign of things to come? ABN AMRO Clearing’s edges. Leveraging on in-house

6 HFMWEEK.COM FUND SERVICES

built risk tool, clients benefit from capital efficiencies and ignoring the potential of the smaller manager is a through position netting across different asset classes wasted opportunity. Less encumbered institutions are (equities, commodities, FX, etc.). All of this helps to able to take advantage of this new reality to give the reduce costs for cash-based prime service offerings in next generation of managers what they need at a price an environment where there is pressure on fund per- they can afford. formance, pressure by investors on fees, as well as the ABN AMRO Clearing is sensitive to the fact that additional costs of capital. smaller managers need infrastructural support. We Going forward for any prime broker to succeed it have a history of nurturing new initiatives in true part- will be about leveraging efficiency. Clients want ac- nership with our clients, and are committed to sup- cess to financing for their trading strategies and asset port specialised managers. This fits our ambition, as protection with the same prime broker. The need for a sustainable, global prime broker, to make our clients return generating strategies has never been greater, globally competitive. Q

HFMWEEK.COM 7 PRIME BROKER 2016

WHERE HAVE ALL OF THE PRIME BROKERS GONE?

INTERACTIVE BROKERS INVESTIGATE WHERE ALL OF THE PRIME BROKERS HAVE GONE AND WHY MANY ARE CHARGING HIGHER FEES THAN EVER BEFORE

Ellen Winston- n an ever-shifting regulatory and competitive land- smoothing effect in sideways markets, but become more scape how are institutional asset managers supposed aggressive when market volatility picks up to ensure the spent most of her Repp to find a long term partner? Existing managers and order is filled. All the strategies weigh the importance of career in the electronic especially new fund managers were once embraced best execution and price improvement with the need to fill brokerage space. She is and coveted by bank-owned prime brokers. All too the order. an accomplished sales frequently, managers find they are being squeezed Active managers should look for a prime broker that executive affiliated with outI of the industry by primes under pressure to free up does not internalise order flowand does not sell order flow Interactive Brokers LLC. their balance sheets, especially due to Basel III regulations. as those practices potentially impact performance and, in Previously Winston-Repp How will the current and next generation of highly some cases, in fast markets, create latency in receiving ex- worked at Bloomberg skilled asset managers apply their skills and perform their ecutions. Interactive Brokers is one of the few brokers who focusing on its Tradebook jobs without the support of an institutional quality custo- neither sells client order flow to large hedge funds and high execution services. dian and prime broker? frequency traders, nor internalises client order flow. Interactive Brokers LLC (IB) remains committed to IB’s algo strategies tap into multiple ECNs and ex- helping institutional clients with transparent prices and changes as well as take advantage of dark pool liquidity Amanda McLean has terms for clients. IB provides a unique turnkey solution only when the order becomes marketable and only if the over 24 years’ experience where clients, large or small, are all welcome regardless of manager can receive the best price available, (NBBO) or in the financial industry AuM, trading style or pedigree. better. Orders are never left in dark pools and all strategies working in her formative Three members of Interactive Brokers’ Institutional attempt to employ forensics anti-gaming logic to protect years for D.E. Shaw & Co. Sales Team present the following five FAQs from clients the manager from HFT and other market predators. and Morgan Stanley & Co. and prospects: This means the manager has the opportunity to imple- servicing large institutions. ment a portfolio strategy without falling victim to slippage, McLean currently works HFMWeek (HFM): How can I maintain access to latency or the fear that his or her hard work in stock selec- closely with global global markets across various products and potential- tion has been sold to the highest bidder. institutional hedge funds, ly improve trading performance, particularly during IB’s Accumulate/Distribute algorithm for block orders wealth managers and periods of heightened volatility? takes things a bit further by offering managers the ability institutions at Interactive to create their own unique custom algorithm based on a Brokers LLC, introducing Interactive Brokers provides direct market access to 100+ variety of user-defined conditions. them to IB’s global clearing markets with the ability for the fund manager to real-time Lastly, managers can use IB’s transaction cost analysis capabilities, products and margin and position monitor on a 24-hour basis. As part reporting functionality to actively evaluate and tweak their services. of IB’s global offering, the firm offers portfolio margin for performance across venues, providing the opportunity to institutional accounts that qualify, and managers can trade adjust accordingly. a variety of products, including equities, options, futures, fixed income – distressed and high yield, as well as com- HFM: Does superior technology provide a competi- Brett Goldstein modities and currencies through one universal account. In tive advantage? has been with Interactive addition, the firm provides 60+ order types and algorithms Direct market access and best execution through IB’s pro- Brokers for almost five that allow traders to manage their trade workflow under a prietary SmartRouting technology helps limit market im- years, serving as director of variety of market conditions. pact and secure liquidity quickly at the best possible price. Hedge Fund Sales, US West The algorithms are designed in-house, and seek price Systems that are routing to trade desks and brokers merely Coast. Prior to IB, Goldstein improvement and to limit market impact under all condi- create latency. The more mouse clicks it takes to route an was a director of Sales for tions. The strategies allow for customisation by the fund order, the more latency involved in securing a fill; hence Citigroup’s Prime Brokerage manager with the ability to set volume percent settings, the short fall. You never want a system that cannot offer business, primarily working customise time and size increments and in some cases set direct market access and real-time portfolio monitoring. in San Francisco along with a level of urgency. Real-time monitoring is imperative as no manager wants his tenure in Hong Kong. Some strategies work well for stock trading with wider to face a day when they are do not know their risk expo- spreads while others trade VWAP style and provide a sure. As for mobile access; you need to be able to monitor

8 HFMWEEK.COM FUND MANAGEMENT

exposure and positions outside the office. Make sure your This point is imperative for an emerging fund: your clear- system is multi-user with a high level of security and access ing firm needs to be 100% committed to supporting your levels that can be modified by user. strategy so that you can spend the next year building up a track record; which was your mission in the first place. HFM: How do I control my operational costs? If I save A few key signs of support might be: a) your prime such a meaningful amount of money with my prime broker compensates you in a transparent and automated broker, will I lose access to core services? fashion for lending long positions which are hard-to-bor- In your search for a reputable custodian or prime broker- row; b) your prime broker provides consistent depth and age firm, ask your provider if they have monthly commis- breadth to meet stock loan needs at a fair price (typically, sion minimums or custodial fees. Make sure there is no Fed Funds Effective overnight rate minus 25 basis points trading or AuM expectation out of the gate. Don’t allow for easy-to-borrow names); and c) provides access to fairly them to say it will be evaluated monthly without spelling priced financing (typically, Fed Funds Effective rate plus out all of the costs and expectations. Selecting a respect- 25 basis points). ed firm is similar to finding a life partner. The fund manager does not want to worry if the firm is going to send HFM: In what ways can my prime broker, as a strate- you divorce papers six months down the road because gic partner, help me raise assets and brand my strategy he or she did not grow fast enough or if your commis- to the investment community? sion wallet is no longer meeting the brokers’ profitability Ask your broker if they have access to capital raising fa- requirements. Make sure the firm is self-clearing so you cilities which they broadly provide at similar levels, to all know you are not getting prices marked up from some of their clients. Or if they most likely only market to their other clearing entity. most profitable clients. Interactive Brokers provides an au- IB is a custody and prime brokerage solution where cli- tomated platform to fund managers who have the ability ents receive great value at an extremely competitive cost. to post their historical performance, as well as information IB is a full service clearing firm offering access to a variety about their fund to IB’s Hedge Fund Capital Introduction of key areas to complement the manager’s day to day work- site. The website is made available at no cost by IB to our flow. Clients have direct access to a well-respected stock high-net-worth and institutional clients, filtered to permit loan desk, voice trading/block desk, soft-dollar team, capi- access by accredited investors, QIBs and other wealth tal introductions platform, training team, dedicated API/ managers interested in hedge fund investments. More FIX specialists, dedicated institutional client service teams importantly, ask your clearing firm what percent of their in the US, Asia and Europe. funds have received some kind of capital investment. The Lastly, make sure the clearing firm is integrated with more automated the process, the more you can focus on your tax, portfolio performance and fund administrator performance and trading. providers so you do not have to focus on processes that The Institutional Asset Management world is chang- should be automated. Emerging managers want to espe- ing for the largest and most well-respected hedge funds cially focus the majority of their time on performance, and advisors, all the way down to the smallest hedge fund strategy and capital raising. and advisor start-ups. Many global banks and brokers are reducing staff, support and access to their prime broker- HFM: Where can the emerging manager thrive today age and custody platforms while increasing correspond- with so many competitors placing resources outside of ing fees. In contrast, IB is in growth mode. Check out our traditional prime brokerage services? complete offering at ibkr.com/hedgefunds.Q

HFMWEEK.COM 9 N PRIME SER WE VIC CO ES Multiple Portfolio & US Custodian Risk Analytics COMPREHENSIVE SOLUTIONS Options New Launch International FOR INVESTMENT MANAGERS Consulting Prime Brokerage

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ON WHAT’S IMPORTANTBusiness Execution Consulting Services

Cowen Prime Services offers a comprehensive suite of brokerage and related services that provide traditional

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Jack D. Seibald Michael S. Rosen Kevin LoPrimo Penn Miller-Jones Managing Director, Managing Director, Managing Director, Managing Director, Global Co-Head of Global Co-Head of Head of International Head of Prime Brokerage Services Prime Brokerage Services Prime Brokerage Sales Prime Brokerage Sales 516.746.5718 516.746.5723 44.20.7071.7555 212.419.3949 [email protected] [email protected] [email protected] [email protected] www.cowenprime.com Member: FINRA, NFA and SIPC PRIME BROKER 2016 FUND SERVICES

TIME TO EMBRACE CHANGE

NICK BRISCOE OF INVAST GLOBAL SPEAKS ABOUT THE DANGERS OF COMPLACENCY AND DETAILS HIS BEGINNINGS IN THE INDUSTRY

pend time reading any high quality, buy or sell Despite how dynamic that job was, despite the extra side focused industry publication these days glint of att raction it sparked in the eyes of women in bars, and you could be forgiven for thinking that the despite the genuine rush of fear it sometimes generated, I fi nancial world as you and I know it, is coming decided one day to change course and accept a job in the to an end. air freight industry. Essentially this meant signifi cantly less Central banks are eff ectively dominating time upside down, signifi cantly more ‘professional’ time at Smarkets, soaking up alpha and forcing investors into the work, and, of course, signifi cantly less interest from wom- cheapest possible beta, while they crush the risk-free rate en in bars. towards a number that very frequently begins with a minus Quite a change. sign. Almost every asset class has proved to be remarkably My new role involved the delivery of time sensitive, Nick Briscoe is adept at wrong-footing some of the absolute giants of the valuable goods to clients within a hugely complex logisti- director of Institutional investing landscape – let alone the cal chain – mostly in the middle of Sales at Invast Global, talented, but still emerging, future the night. Th ese valuable goods of- specialising in global listed stars. And, last but not least, regu- ten included massive boxes of live and OTC derivative markets. lators globally have the wind at grasshoppers to interstate pet stores He has an engineering their backs post-GFC, imposing TO IMPROVE IS TO (which were presumably fed to oth- background and specialises severe restrictions on who exactly er, higher value members of the pet in combining technical skill a traditional bank can and cannot CHANGE; TO BE PERFECT store food chain) and entire aero- and knowledge of global deal with, what products that bank plane loads of packaged blood to be markets to offer optimised is able to provide reliable pricing IS TO CHANGE OFTEN transported to regional hospitals. prime services solutions to the client in, the terms under Barrel rolls were a distant memory. tailored to clients. which their relationship must Th e aviation industry was di- be conducted and (indirectly) Winston Churchill verse, challenging, at times hum- just how much the bank needs to ” bling but most of all, hugely reward- charge that client – to which the ing –although not so much in the answer is always: lots more! fi nancial sense! Whenever any of my current colleagues or Describing this present situation as “sub-optimal” for clients discover my fl ying past, the seemingly universal re- fund managers would be an understatement, right? sponse is: “What are you doing sitt ing behind a desk work- Or is it? ing in fi nancial markets?!” I would argue that these changes have created a positive Th e simple, but oft en unspoken answer to that question environment, particularly for emerging managers. Inno- is; change. I like it. vative non-bank providers are being given space to grow as the banks contract. It is a new era, and the most astute RESISTING CHANGE IS NATURAL, BUT NOT LOGICAL managers are moving with the times, embracing the non- As humans we mostly seem to be hard-wired to avoid bank providers and are being rewarded with more fl exible change as much as possible, and frankly, the fi nancial in- conditions, oft en lower fees and bett er service. dustry resists and fears change more than most. Something about the relatively high remuneration and cut-throat cul- WHAT I DID AND WHAT I DO ture tends to make any disruptions to ‘scheduled program- I previously fl ew aeroplanes for a living. My fi rst job in the ming’ especially scary. industry was fl ying an assortment of former Chinese, Rus- What particularly surprises me about this point of view sian and French air force aircraft , along with taking passen- is that almost everyone in this industry gets paid by exploit- gers fl ying in a two seat version of the Red Bull Air Race ing change! Th e equity manager makes returns from the planes so they could experience what it was like to pull 8 G market fi nally catching on to the earnings growth change and later brag about it. Needless to say it was a prett y cool she was forecasting six months ago. Th e market maker gets job, one which I probably would have done for free. paid from truly understanding changes in liquidity on the

HFMWEEK.COM 11 PRIME BROKER 2016 FUND SERVICES

bid and offer. The FX trader gets paid from understanding a 56-year history in global FX and securities markets and flow and positioning changes better than the market and provide clients with the transparency of being listed on the the fixed income manager gets paid from understanding Japanese stock exchange. that… errmm central bankers only know how to cut rates We are a company that has embraced change by utilis- and thus they will never change? ing and providing our clients with leading edge technol- So, back to the supposedly “sub-optimal” current situa- ogy but we also stay true to the conservative culture that tion and in particular, a prime brokerage landscape that is has allowed Invast to prosper throughout the many cycles changing daily... it has encountered in our long operating history. The major, systemically-important banks are in a regu- Clients of Invast Global have access to a range of estab- latory-enforced retreat. Their world has changed and every lished bank and non-bank liquidity providers, a dedicated activity they perform is weighed carefully against how API team, bespoke reporting capabilities, highly advanced much balance sheet it consumes and the return it gener- trading platforms, a 24-hour trading team for outsourced ates. We all know this to be true because most of have wit- execution, flexible account conditions, direct connectiv- nessed these changes occurring right in front of us since ity to global equity markets and the ability to trade multi- the GFC. asset strategies all through a single facility. What is less obvious is that while a regulatory reform Invast is far from alone. If we look out to another sector process that is scheduled to extend through 2019 and banks previously dominated, liquidity provision, we see a beyond continues to impact the traditional banks, a sig- growing trend for exceptionally smart, technically astute nificantly more dynamic and responsive group of industry and highly specialised market making firms that continue participants has emerged to take their place – the ‘non- to grow their market share in both listed and OTC mar- banks’. kets. In most cases these firms provide a different dynamic These non-bank entities are expanding across the ser- to bank liquidity in that they are trading over varying time vice, product and value chain that was previously domi- horizons and have an ever expanding appetite for taking nated by the major banks. The top tier of these non-bank smart risks – once again something banks previously re- organisations are highly professional, well-capitalised and garded as their value add for clients. supremely focused on delivering exceptional service levels So if you’re reading this publication, you’ve likely es- to clients. tablished, or are in the process of establishing your fund’s Far from being a ‘poor cousin’ to a traditional bank facil- reputation for being an innovator in financial markets and ity, I would suggest that for clients of this top tier of spe- taking intelligent risks. You’ve also no doubt embraced cialist firms, the change has been a refreshing experience. and profited from changing market dynamics. Changes in the prime services sector should be ap- US proached in the same way. The reality is, the industry has Take my firm Invast Global; we are a leader in providing evolved and the banks are now no longer the bastions of non-bank prime services to brokers, hedge funds and pro- prime services they once were. prietary trading firms, focusing particularly on customisa- So my message is simple, don’t fear the changes that ble eFX liquidity and direct market access to global equity dominate our world right now. Find the right companies markets with leverage and borrow. Notably, we also have to partner with, and embrace it. Q

12 HFMWEEK.COM With good technology integral to running a successful business, HFM Technology provides actionable and practical insights on how funds can beneﬁ t from and be er understand the rapidly developing tech space

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BREAKING UP IS HARD TO DO

GLOBAL PRIME PARTNERS INVESTIGATE THE STAGES OF A PRIME BROKER SPLIT AND HOW BEST TO DEAL WITH THE AFTERMATH

o one likes the Dear John lett er. No one increasing regulatory pressures. Banks are forced to likes to be dumped. But in the increasingly evaluate the return on assets (ROA) of their clients and regulated world of bulge bracket invest- imposing tougher restrictions on bank capital and liquidity. ment banks and their prime brokerage busi- To remedy the situation, a fund can always try and work nesses, the dumping of smaller clients is a more closely with their PB to help them meet their re- fact of life and is only accelerating. And as quired ROA and make more effi cient use of their balance- NKubler-Ross taught us, the several ‘Stages of Grief’ that sheet. If this is not successful, then the fi nal solution may follows could be a long and bumpy road; from the initial be to migrate the business to another PB. Hopefully, this is shock, then denial and ultimately depression before even- a PB that is as keen to do business with the manager as the Sean Capstick is tually moving on to acceptance. manager is with them. One that can ideally move quickly director, head of prime and work within a tight off -boarding deadline. You cannot brokerage at Global Prime stress this enough – on-boarding times vary hugely across Partners. He joined in 2015 the market; more nimble providers can be live with a client from RWC Partners, Equity in a number of weeks and thus reduce any business-as-usu- Asset Manager. He previously al interruptions, minimising the burden on the operations, worked on the Sell Side for legal and technology functions at the fund. over twenty years, most recently as European head ARE YOU VULNERABLE? of Prime Brokerage at Bank How do you know if your fund is about to be removed of America Merrill Lynch. He from your PB’s book of clients? What are the warning had a series of senior equity signs? Take this simple test to see if your fund looks vul- and prime brokerage roles nerable and needs to potentially fi nd a new home. at Deutsche Bank, Morgan WHY ARE THE LARGER PBS CUTTING SO MANY CLIENT Stanley and Goldman Sachs. RELATIONSHIPS? 1. Who is your prime brokerage sales coverage? Tighter regulation, Basel III and a renewed approach to a) Th e very senior managing director who you met as part return on assets, return on balance sheet, etc., to returns of your PB beauty parade generally, are forcing many of the traditional bulge bracket b) Another member of the PB sales team prime brokers to re-evaluate their book of hedge fund cli- c) Only access is to the client service team ents. Banks are looking at all the revenue streams from a client and will remove those not meeting their minimum 2. Where is my client service supported from? thresholds. Once it was acceptable for a client to pay its a) London or Paris, the PB’s main location prime broker for traditional fi nancing, stock borrowing b) Another city, not the PB’s main location and so forth alone, now the expectation is a hedge fund c) An off shore location pays its provider across multiple revenue channels and the hurdle rates have moved up. It seems unlikely those hurdle 3. What client service support are you gett ing? rates will come down any time soon. a) Responsive, high-touch, rapid turnaround to my request Being assigned a low priority can manifest itself in vari- b) Low touch, takes time to get my requests sorted ous ways. Perhaps a fund may not receive the day-to-day c) My client service is a call centre care and att ention they were hoping for on the operational side. So, for example, enquiries are not dealt with in a time- 4. Stock lending ly manner. As things become more severe, short positions a) I get decent access to hard to borrows may be re-rated and recalled more oft en than anticipated, b) I get re-rated and recalled on positions or even not covered at all. Th e margin-loan book on the c) I get no access to hard to borrows long side may even be re-priced. Access to scarce resources, such as new issuance allocations, may become limited 5. Emerging markets/fi xed income or non-existent. a) I get off ered fi nancing on my emerging markets and Ultimately, fund managers may be cut by their PB fi xed income positions altogether, which is happening more and more as major b) I get no access to leverage on my emerging market and banks focus on their core clients due to these ever- fi xed income positions

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6. Pricing that values the relationship. a) My pricing has stayed stable At Global Prime Partners, we have grown up for the b) I have been re-priced last eight years as a non-bank prime broker, offering a full c) A minimum fee been imposed on my account suite of financing, technology and execution solutions specifically for the smaller hedge fund. We are not 7. Revenue wallet regulated as a bank and are not constrained by the same a) My PB offers more services because I’m a ‘good payer’ return criteria as our bulge bracket peers. b) My PB refers to me increasing my ‘holistic revenue pay- ment’ to the bank across all the different business silos, not WHAT TO DO NOW? just prime brokerage If you feel you are about to get the heave-ho then Global Prime Partners would like to talk to you and learn more If the answer to any of the above was either ‘b’ or ‘c’ then about your business. We offer: there might be cause for concern. This tells you that your 1. Broad financing capabilities, with an appetite to look fund might be ranked low down on the client roster, po- at emerging market and fixed income securities tentially edging closer to the target-list in the next round 2. High touch client service. Our team will pay close per- of culling. But don’t get caught off-guard – the above ques- sonal attention to your account. We will call you back. tionnaire has helped identify the risks and skip past the We will not send you to a call-centre. various initial ‘Stages of Grief’ straight to ‘Understanding’. 3. Confidence in access to a secure inventory of stock Getting to ‘Acceptance’ shouldn’t be difficult; regulation is borrows only getting more and more onerous and hence it’s easy to 4. Swift onboarding to the Global Prime platform. This see how this trend is only likely to continue and potentially can be completed in weeks not months. even accelerate. So then we need to get on to ‘Moving On’ – choosing a Don’t get dumped. Get even. Call Global Prime new prime broker. One that is in it for the long-haul, one Partners now. Q

HFMWEEK.COM 15 PRIME BROKER 2016

HEDGE FUND HEADWINDS: PERFORMANCE IS THE SOLUTION

JACK SEIBALD OF COWEN PRIME SERVICES DISCUSSES HOW THE INDUSTRY MUST MOVE ON FROM THE TURBULENCE EXPERIENCED IN RECENT TIMES

his year is on track to be the fi rst since the THE RELATIVE UNDERPERFORMANCE OF HEDGE FUNDS fallout from the fi nancial crisis, during which Hedge funds have historically aimed at delivering outsized assets invested in hedge funds will end the returns regardless of market conditions, and have done this year below where they began. Lagging per- through strategies that focused on delivering alpha from formance through the fi rst half of the year has longs as well as shorts, and by understanding that outsized led to further investor disappointment and in returns also generally required greater risk or volatility of Tredemptions, most notably from several high profi le pen- those returns. In recent years, however, results have been sion funds. Start-ups this year are also running at a much underwhelming. From the beginning of 2009 through the slower pace compared to recent trends, while funds clos- end of last year, the HFRX Global Index is up roughly 15%, ing down are proceeding at a faster clip. How did we get or about 2% annually over the period. While the equity here, and how do we reverse these conditions? segment of the index performed a bit bett er over the same Jack Seibald is global It’s no secret that hedge fund managers have been facing time frame, this still lagged the nearly 15% compounded co-head of Cowen Prime headwinds in recent years. In my opinion, there are three annual return recorded by the S&P 500 including divi- Services, LLC. He was a major issues hedge fund managers are increasingly having dends. Performance year-to-date is similarly uninspiring. co-founder and managing to deal with: Th ere are obviously various reasons for such lagging member of Concept Capital 1. Th e continuing growth of passive versus active investing performance, but to my mind one in particular stands out, Markets, LLC until its 2. Th e relative underperformance of hedge fund returns and that is the dramatic rise in the prominence of institu- acquisition by Cowen Group, during the bull market since the fi nancial crisis tional investors in hedge funds and the infl uence this in- Inc. in September 2015. He 3. Th e compression of investment management and investor class has had on manager behaviour. It’s apparent to has been affiliated with the centive fees. lots of industry observers that many managers, in an eff ort firm and its predecessors to att ract and appease these large pensions and endow- since 1995, and has THE CONTINUING MOVE TOWARD PASSIVE INVESTING ments, morphed their strategies to dampen the volatility extensive experience in Th e data clearly shows that active managers have increas- in their portfolios. prime brokerage, investment ingly had a diffi cult time beating the market averages. Essentially, these managers appear to have been “re- management and research We have, of course, essentially been in a one-directional trained” by these investors and the very large allocations dating back to 1983. market since the post-fi nancial crisis lows in March 2009, they make, and became satisfi edasset gatherers rather than which is not exactly the kind of environment that’s sup- alpha generators. Nowhere is this trend more evident than portive of specifi c security selection. In contract, purvey- in the amount of capital that’s been put to work in liquid ors of passive investment strategies have delivered in this alternative structures, in which managers for the most part environment, and done so at cut-rate investment manage- don’t have the fi nancial incentive to outperform. ment fees. It’s not surprising then that assets represented by passive strategies continue to grow at a much faster TREND IN FEE COMPRESSION pace than those managed actively. Th ink of how easy it’s Th e magnitude and the duration of hedge fund underper- become for investors to get into the market, or any subsec- formance has not gone unnoticed, and investors have in- tor of the market for that matt er, by simply buying an index creasingly raised concerns over the high management and fund or ETF. incentive fees charged by hedge funds. Th e recent spate of As recently as 2012, assets managed passively on a announcements by some large pensions that they would global basis accounted for 11% of total assets according be divesting their hedge fund allocations is certainly a to consultants PwC. Th at same study suggests that shares manifestation of their diminished interest in paying above- will have doubled to 22% by 2020. Th e trend is even more average fees for below-average performance. Th e industry pronounced in US equities, where Morningstar estimates has already seen other adjustments as well, including the show the passive share of assets at more than 40%. So proliferation of ‘founder investor classes’ off ering alloca- while actively managed assets are still projected to grow, tors reduced management and incentive fees for early in- clearly an increasing share is going passive and thus further vestments. Th e days of ‘2 and 20’ appear to have gone by, out of the reach of hedge fund managers. and at least from where we sit, ‘1.5 and 15’ seems to be the

16 HFMWEEK.COM FUND SERVICES

new norm. Here again, I would suggest that the move into increased risk and volatility in returns. Too much empha- liquid alternatives has played a key role in dampening fees. sis on risk management and not enough on performance is a key reason, in my opinion, that the hedge fund industry WHERE DO WE GO FROM HERE? finds itself at this crucial juncture. As a former analyst and investment manager, and an in- Nothing will make talk of redemptions and the push vestor in hedge funds, I very much believe in the concept back on high fees fade faster than evidence of a return to of outperformance, and that ultimately, performance, or outperformance at a time when markets aren’t deliver- rather outperformance, matters. ing positive returns. In my view, the alpha generators will In my mind, passive investing is really nothing more again gain the attention of investors seeking such returns. than a race to mediocrity, something completely antitheti- My simple message to those managers who have become cal to what the capital markets are all about. More impor- exquisite explainers of everything they do to mitigate tantly, it accomplishes none of the basic objectives of in- risk, is that they perhaps consider expending more effort vesting. It doesn’t provide the mechanism for establishing discussing their alpha generating strategies, delivering the fundamental price of a business and its securities, and on them, and remembering that growing through perfor- certainly doesn’t solve for the capital formation needs of mance can be financially very rewarding. The goal should emerging and growing companies. simply be to be better, not bigger. Though it has worked in recent years as the markets Fortunately, the industry continues to see a steady have been broadly rewarding, I think it’s fair to question stream of portfolio managers who very much embody the whether it can or will survive the next bear market. I doubt principal of outperformance and believe that it’s their re- it, and believe that when that next major correction comes, sponsibility to aim for it, a clear sign of encouragement for capital will again look for outlets that can and will provide the hedge fund industry. I am also encouraged by the re- positive returns. cent announcements of hedge fund divestment by certain It’s therefore crucial, in my opinion, that hedge fund large pensions and endowments, as I see this as a sign of managers remember how to shoot for outperformance. capitulation by this investor class just at the time when the They need to again get comfortable with the simple notion downside protections typically provided by hedge funds that outsized returns generally require the assumption of will be needed. Q

HFMWEEK.COM 17 PRIME BROKER 2016 SERVICE DIRECTORY

ABN AMRO Clearing, Gildas Le Treut, Global Director Prime // [email protected] // T: +33 1 56 21 9833 // Delphine Amzallag, Head of Relationship Management Prime Europe // [email protected] // T: +44 20 3192 9062 // Gary John-Baptiste, Sales Director Prime Europe // [email protected] // T: +44 20 3192 9150 // Brian Duff, Sales Director Prime US // [email protected] // T: +1 312 604 8208 ABN AMRO Clearing is recognised as a leading provider for integrated solutions in the domain of execution, clearing, custody, financing and risk management across asset classes, on a wide range of markets globally. The ABN AMRO Prime Clearing service offering is extremely well fit to service hedge funds that apply strategies in multiple asset classes based on CTA/Managed Futures; Relative Value Arbitrage, volatility and long/short equities. Our innovative services include synthetic products and Risk Management of the investment portfolio based on correlation between asset classes. Investment firms particularly value our sound balance sheet, a high level of asset protection and operational excellence.

Cowen Prime Services, Jack Seibald, Managing Director, Global Co-Head of Prime Brokerage Services // Direct: +1 516 746 5718 // Mobile: +1 516 359 7503 // [email protected] // 599 Lexington Avenue, 21st Floor, New York, NY 10022 // Kevin LoPrimo Managing Director, Head of International Prime Brokerage // [email protected] // Tel: +44 20 7071 7555 // 1 Snowden Street, 11th Floor London EC2A 2DQ Cowen Prime Services, LCC offers comprehensive brokerage and related services that provide traditional and alternative investment managers with customisable and scalable solutions. We were built by former investment managers to serve hedge fund managers, managed account platforms, institutional investors, family ofﬁces, and registered investment advisers with turnkey solutions designed to free clients to focus on their core competencies. Our offering features world-class custody and clearing options, multi-asset class capabilities, leading execution and order management systems, a seasoned execution desk, a range of ﬁnancing options, a highly professional operations and customer support team, comprehensive portfolio reporting capabilities, and capital introduction.

Global Prime Partners, Sean Capstick, Head of Prime Brokerage // T: +44 (0)207 399 9457 // [email protected] Julian Parker, CEO // T: +44 (0)207 399 9450 // [email protected]

Global Prime Partners is a multi-award winning financial services firm that provides prime brokerage, execution and clearing services to hedge funds, broker-dealers, asset managers, family offices and professional traders. Clients are able to access the global financial markets via its multi-asset class trading platform, which provides trade execution, margin financing, securities lending, clearing and custody services. Global Prime Partners prides itself on providing state-of-the-art technology and an institutional strength operational infrastructure, with a focus on tailored customer service.

Interactive Brokers, T: +1 855 861 6414 (US toll-free) // 8 Greenwich Ofﬁce Park, Greenwich, CT 06831 // www.interactivebrokers.com

Interactive Brokers LLC is an automated global electronic broker that caters to ﬁnancial professionals by offering state-of-the-art trading technology, superior execution capabilities, worldwide electronic access, and sophisticated risk management tools at exceptionally low costs. Interactive Brokers offers complete prime broker solutions, including custody, execution and clearing, and reporting. Innovative trading technology lets you trade on over 100 market centers in 24 countries, and gives you direct market access to stocks, options, futures, forex, bonds, ETFs and CFDs from a single account.

Invast Global, Nick Briscoe, Institutional Sales // T: +612 9083 1343 // [email protected] // Lochlan White, Marketing // T: +612 9083 1336 // [email protected] Invast Global is a leading multi-asset brokerage and prime services provider based in Sydney, Australia. We specialise in providing prime services to small/ mid-sized hedge funds, asset managers, proprietary trading forms and other brokerages. Our JASDAQ-listed Japanese parent – Invast Securities Co. has a 60-year history as a Forex and Securities brokerage and enjoys stable, long-standing relationships with numerous tier-one Prime Brokers. As part of our G L O B A L “PurePrime” facility, we aggregate the best Bank and non-Bank liquidity to give our clients bespoke, optimised liquidity streams for FX, Metals and CFDs. We have designed a suite of trusted collateral solutions and leverage arrangements that provide clients with unparalleled choice, and the ability to maximise the efﬁcient use of capital. The spirit of our Japanese heritage translates into industry-leading connectivity solutions, encompassing servers in NY4, LD4 and TY3, as well as superior DMA connectivity to over 30 global stock and futures exchanges.

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18 HFMWEEK.COM PurePrime.

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Sales Gary John-Baptiste Brian Duff Europe: +44 203 192 9150 US: +1 312 604 8208