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Prime Brokerage in FOCUS 2021

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Prime Brokerage in FOCUS 2021 Prime Brokerage IN FOCUS 2021 INDUSTRY OUTLOOK BOUTIQUE PRIME BROKERS OUTSOURCED TRADING Buoyancy in hedge funds bodes Client relationships key to rise Extensive capabilities deliver in well for PB business of boutique PBs challenging times Featuring Cowen | IG Prime | Jefferies | Lazarus Capital Partners | Triad Securities World-class integrated prime brokerage solutions Dedicated client service & dealing capabilities Simplified prime structure Unrivalled market access Online reporting & portal Execution, custody & financing Multiple asset class coverage Full service global markets execution with dedicated dealer representative Industry leading rules-based margining across all asset classes Flexible account structures and reporting capabilities fully tailored to the specific needs of each client Institutional grade Prime Services for hedge funds, family offices and HNW private clients www.lazaruscapitalpartners.com Australia | Hong Kong Contact us for a confidential discussion [email protected] CONTENTS 06 INSIDE THIS ISSUE… 04 HIGHER SCRUTINY WELCOMED BY THE INDUSTRY By A. Paris 06 THE IMPORTANCE OF BEING VISIBLE Interview with Barsam Lakani & Leor Shapiro, Jefferies 09 STRONG CLIENT RELATIONSHIPS SUPPORT RISE OF BOUTIQUE PRIME BROKERS Interview with Dale Klynhout, Warren Goward & Nicholas Stotz, Lazarus Capital Partners 12 INDUSTRY SUPPORTIVE OF PRIME BUSINESS DESPITE 09 HURDLES Interview with Jack Seibald, Cowen Prime Services 14 KEEPING STRONG IN A STORM: EXTENSIVE TRADING CAPABILITIES DELIVER Interview with Larry Goldsmith & Michael Bird, Triad Securities 17 DIRECTORY 12 Published by: Hedgeweek, 8 St James’s Square, London SW1Y 4JU, UK www.hedgeweek.com ©Copyright 2021 Global Fund Media Ltd. All rights reserved. No part of this publication may be repro- duced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. Investment Warning: The information provided in this publication should not form the sole basis of any investment decision. No investment decision should be made in relation to any of the information provided other than on the advice of a professional financial advisor. Past performance is no guarantee of future results. The value and income derived from investments can go down as well as up. PRIME BROKERAGE IN FOCUS | May 2021 www.hedgeweek.com | 3 OVERVIEW Higher scrutiny welcomed by the industry By A. Paris ust four months into 2021 and the hedge fund industry across the prime brokerage industry, the resulting increased has already experienced two major events affecting scrutiny is being welcomed. Barsam Lakani, Global Head J prime brokerage – the GameStop run and the Archegos of Prime Services Sales, Jefferies says: “Redirecting the collapse. Though these incidents may have rocked some spotlight on the importance of risk, liquidity, and margin firms, others have held strong and are almost appreciative management is a good thing. It’s healthy for the entire of the greater scrutiny resulting from such episodes. industry. Ultimately, it’s certainly beneficial for the hedge “As a result of the GameStop experience, prime brokers fund players, their prime brokers and the end investor. The have been forced to be far more vigilant with their clients’ entire ecosystem benefits.” exposure to names they were trading,” notes Jack Seibald, Managing Director and Global Co-Head of Prime Brokerage Reputational damage & Outsourced Trading, Cowen. “We changed our margin The second episode to hit the headlines was the collapse and risk rules almost on a daily basis to protect the clients of Archegos Capital Management – a family office run and the firm, fully understanding that if clients blow them- by hedge fund manager Bill Hwang. Evidence shows the selves up, our capital is next in line for collapse.” organisation collapsed following the overuse of leverage, The jury is still out on whether it was amateur trades in a bid to chase higher returns. who drove the GameStop run or whether Wall Street infil- Several large prime brokers, most notably Credit Suisse trated the online chatter and sought to take advantage of and Nomura, were badly hit by this collapse, haemorrhag- the circumstances. Whatever the cause, the incident almost ing money as a result. put hedge fund Melvin Capital out of business and prime Seibald outlines: “The Archegos collapse raised some units across the industry saw a large pile of unwound bets. bigger questions related to counterparty risk. There were However, although this event has had reverberations prime brokers relying on their clients to be truthful and 4 | www.hedgeweek.com PRIME BROKERAGE IN FOCUS | May 2021 OVERVIEW The Archegos collapse raised some bigger questions related to counterparty risk. There were prime brokers relying on their clients to be truthful and disclose their full exposure to certain securities. Jack Seibald, Cowen cheap rates will largely be unaffected by this turn of events. Lakani observes: “We were having these conversations around diligence and risk management before this episode hit the news. It’s not new and clients are always monitor- ing this and asking questions related to the controls that exist in our industry, especially for us as a prime broker. Historically, at Jefferies, we’ve always been very transparent disclose their full exposure to certain securities. This was with clients. We are very clear and communicative around proven to be a sub-par risk management tool and some how we manage our prime brokerage business and how firms got hit quite hard. we intend to operate as a prime broker. “For some of the worst hit firms it is a blemish which “So, we welcome the increased level of questioning. We will be hard to overcome from a client relations perspective think these conversations are healthy and important. We – if one of these prime brokers were one of your principal have never shied away from these topics and certainly counterparties, you may wonder whether your assets are today we’re being even more vocal and engaged on these well protected.” items.” Dale Klynhout, Managing Director, Lazarus Capital Partners, comments: “The well-publicised Archegos losses Talent moves and career risk across a number of tier one prime brokers will further Events like this also have repercussions on talent and adjust the relationship dynamics. Prime brokers who had recruitment. Reportedly, several managing directors at been proactive about risk mitigation and collateral manage- Credit Suisse, one of the firms hardest hit by the Archegos ment prior to the sell-off were better positioned to weather collapse, have either left or are in the process of leaving. the unprecedented spike in volatility, which resulted in Seibald says: “It has definitely caused many talented fewer clients being forced sellers prior to the recovery in people to consider their options since their careers were equity markets. at risk of being ruined by poor decisions made somewhere “We have found that our ability to guide clients through else in the bank.” the crisis has led to new levels of trust and respect, which These moves are understandable, given that career has enhanced our ability to uphold collateral and margin risk is a significant concern among hedge fund manag- standards during a rising market where a client’s attitude ers. A study by State Street Global Advisors found 52 towards risk becomes complacent towards the threat of a percent of industry professionals worry about career risk. downturn.” Further compounding these worries, a research study by In Seibald’s view: “As it relates to the large bulge bracket the Center for Studies in Economics and Finance at the prime brokers, I think there will be a reassessment of the University of Naples in Italy found that poor performance relationships they have with clients to which they’re extend- followed by fund liquidation can lead to high level employ- ing enormous amounts of credit. The prime brokers are ees suffering permanent career setbacks, including lower going to want greater transparency, as to the clients’ expo- salaries for years. sure to the underlying securities, that the bank is financing This paper, entitled Career Risk and Market Discipline in at that moment in time.” Asset Management, was first published in 2017 and re-is- Prime brokers which are not heavily dependent on sued in 2020. It studied the impact of fund liquidations on providing hedge funds with large amounts of leverage at asset managers’ careers. n PRIME BROKERAGE IN FOCUS | May 2021 www.hedgeweek.com | 5 JEFFERIES The importance of being visible Interview with Barsam Lakani & Leor Shapiro lthough it ushered in a whole host of new chal- and unsure of how to engage. Now, especially as people lenges, when it came to client and audience are starting to see a light at the end of the tunnel, we’re Aengagement, the Covid-19 pandemic levelled the starting to see that client engagement really pick up. And playing field between the big banks and smaller players in attendance is higher than it would have been in another the prime brokerage market. It encouraged dialogue and period of time, so we’re very encouraged that we can oper- boosted transparency. Further, in view of the expected ate efficiently and effectively within these circumstances.” growth in outsourced trading in Europe and Asia, ensuring Shapiro outlines how the Jefferies capital introduction a good fit between providers and clients has never been events started out with people in three or four countries more relevant. but now host attendees from around 13 or 14 different loca- “In a way, the pandemic helped us,” explains Leor tions: “We’ve become more global very quickly.” Shapiro, Global Head of Capital Intelligence, Jefferies. “As The firm’s next event is focused on the consumer and it relates to my team in terms of events, it meant we could technology sectors, with 20 managers who work in those have the same reach as the big banks, without having to specific verticals.
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