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prime broker

Page history last edited by PBworks 11 years, 8 months ago

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Prime Brokerage

see wikipedia article:  Prime brokerage

 

Main Functions:

 

1.  For Hedge Funds:

  • provide lending and custody of assets
  • Hedge funds typically park their assets at the prime brokerage (bank), which are in turn lent out to other firms.
  • close relationship with prime brokers (they even sometimes provide office furniture for up and coming hedge funds)

 

Hedge Fund Fears:

  •      If a prime brokerage gets into trouble (as Bear Stearns did)...it could hurt the Hedge Funds. 
  •      If capital gets tight...and banks tighted lending terms, it could hurt highly leveraged hedge funds.
  •      If a prime brokerage were to fail....it could be fatal for many hedge funds (which explains why the fed acted so quickly to save Bear Stearns during the credit crisis of 2007-08

 

Attempts to diversify away the risk:

  • because there are only a handful of major prime brokers, it is very difficult for hedge funds to diversify away this risk
  • very difficult to protect assets held at the prime brokers using traditional hedging techniquies
  • might diversify by using more than one prime broker, but that just shuffles around the risk rather than getting rid of it all together.
  • counter-party risk is "unavoidable"

 

New kind of insurance:

  • Federal reserve bail-out of Bear Stearns
  • implies an implicit guarantee from the Fed that they wont let a big brokerage fail

 

New regulations coming:

  • with this implicit guarantee will surely come more regulations
  • Impact:   there will likely be less lending from prime brokers to hedge funds (at the least, more collateral will be required).

 

 

 

 

 

 

 

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