Prime brokers facilitate investment activity on behalf of a hedge fund very often with capital borrowed against the hedge fund itself. As hedge funds can be active with numerous brokers, a prime broker enables greater visibility on performance as all trades are settled through the prime broker. Their responsibilities can vary depending upon what is right for you and your hedge fund.
Prime brokers have experienced dealers to manage online trading with more complex order voice brokerage services. Prime brokers will provide their clients with an online trading platform with dedicated lines as well as dealers to execute orders over the phone (voice dealing).
Clearing & give ups
Prime broker clients can trade through smaller brokers and spread orders across multiple execution brokers, then give up to a main clearing prime broker to maintain execution anonymity.
When hedge funds and traders have short positions the underlying shares need to be borrowed. Prime broker’s securities lending departments enable their clients to borrow securities directly from a prime broker to reduce financing costs and the risk of holding a long-term short-position.
Prime brokers will have dedicated client services departments to provide back-office support for their clients to handle complex corporate actions, clearing issues, and general account management.
Risk management & financing
Clients of prime brokers can manage cross-exchange positions with SPAN margin facilities to ensure minimal margin requirements on hedged and offset positions with overall portfolio risk management.
Reporting & portfolio technology
A hedge fund can outsource the proper compliance and regulatory processes needed to run a hedge fund to their prime broker through consultancy services and risk management technology.
One of the major value adds of prime brokers is their network of clients. Hedge funds can take advantage of a prime broker’s network to generate an inflow of capital and new business and increase their visibility.
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