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HFMWEEK

S P E C I A L

R E P O R T

PRIME BROKER 2 0 1 6
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 exible alternative to the traditional,
bulge bracket prime brokers. We offer bespoke solutions and quick to
market account opening. This is why weve won the HFM Week Award for
Best Boutique Prime Broker for ve years in a row.
To see how we can add value to your business, visit our website
globalprimepartners.com, email info@globalprimepartners.com
or call +44 (0) 20 7399 9450

FOR PROFESSIONAL CLIENTS ONLY. NOT FOR USE FOR RETAIL CLIENTS. This is not a solicitation of
any offer 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
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

Published by Pageant Media Ltd


LONDON
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REPORT EDITOR Tom Simpson T: +44 (0)207 832 6535 t.simpson@pageantmedia.com HFMWEEK HEAD OF CONTENT
Paul McMillan T: +1 646 891 2118 p.mcmillan@pageantmedia.com HEAD OF PRODUCTION Claudia Honerjager
SUB-EDITORS Luke Tuchscherer, Alice Burton, Charlotte Romeyer ASSOCIATE PUBLISHER Lucy Churchill T: +44
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HFMWeek is published weekly by Pageant Media Ltd ISSN 1748-5894 Printed by The Manson Group
2016 all rights reserved. No part of this publication may be reproduced or used without the prior
permission from the publisher

H F M W E E K . CO M 3

CONTENTS

PRIME BROKER 2016

06

FUND SERVICES

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

08

11

TIME TO EMBRACE CHANGE


Nick Briscoe of Invast Global speaks about the dangers of
complacency and details his beginnings in the industry

14

FUND MANAGEMENT

FUND SERVICES

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

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

FUND SERVICES

16

FUND SERVICES

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

4 H F M W E E K . CO M

Interactive Brokers
FOR HEDGE FUNDS

A Prime Broker for


Cost-Sensitive Hedge Funds
Interactive Brokers offers complete prime broker solutions,
including custody, execution and clearing, and reporting
Q

Lowest Margin Rates and Commissions


IB offers the lowest margin interest rates1 of
any broker; transparent, low commissions; and
best price executions.2

Q

Securities Financing
Our real-time depth of availability helps you locate
hard-to-borrow securities and helps protect against
buy-ins and recalls. View the number of shares available
to short, the indicative interest rate charged on
borrowed shares and the current Fed Funds rate.

Q

Strength and Security


IBs prime brokerage services are backed by a
strong balance sheet, large relative equity capital,
low-risk business model, client fund protection and
consistent performance.

Q

Trading
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.

Q

Investors Marketplace
for Access to Capital Introduction
Our groundbreaking online service lets participating
hedge funds market their funds to IB clients who
have been qualied as Accredited Investors or
Qualied Purchasers.
To nd out more, contact an
IB representative by calling toll free

855-861-6414
or by visiting:

ibkr.com/hfm
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 Barrons 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


change, Albert Einstein apparently once
said. And change is what the hedge fund
industry and its service providers have
been trying to deal with since the financial
crisis.
Going forward it will be interesting to observe
which intelligent solutions prime brokers can come
up with to help their clients grow and prosper in an
environment with increased regulation and continued
low interest rates, where cash and other collateral on
deposit tend to cost money. In fact, for a 10 million
deposit overnight clients will find themselves paying
for the privilege.
None of this is new, and much has already been
written about the impact of Basel IIIs capital requirements, the Central Counterparty Clearing for FX
and equity securities financing.
These environmental changes
forced some of the larger banks
to revisit uneconomical prime
brokerage and custodial accounts as they look to optimise
their balance sheets.

FIGHTING YOUR CORNER


Today, investors need returns and so hedge funds have
a rare second chance to stage a comeback. Obviously
not every structure and not every strategy, but any
area that can achieve the return requirement outcome
investors seek needs to be supported.
The argument that smaller managers can add returns still holds, either because they are more nimble
or because they can allocate appropriate amounts to
size sensitive strategies. According to research published last year by City University London - Sir John
Cass Business School a hedge fund with 200m in
assets could on average outperform a 5bn hedge fund
by 125 basis points a year and a 1bn fund by 61 basis
points.
The authors also found that other things equal, investors would have been better off with smaller hedge
funds than with large ones during the crisis periods. But that is
only if these smaller managers
can get financing at a reasonable
rate, otherwise gains get wiped
out in costs. So what options to
smaller managers have if the big
banks are shedding their smaller
or less profitable accounts?
The last couple of years have
seen the rise of two alternatives:
technology driven mini-prime
brokers with limited balance
sheet, focusing on smaller managers and expert prime brokers
servicing specialised strategies. Due to its tradition in post
trading, ABN AMRO Clearing has been able to offer
clients prime brokerage and custody services which
leverages their derivatives clearing expertise and financing capacity for quantitative and arbitrage strategies.

TODAY, INVESTORS NEED


RETURNS AND SO HEDGE
FUNDS HAVE A RARE
SECOND CHANCE TO STAGE
A COMEBACK

Gildas Le Treut is
global director of prime
clearing at ABN AMRO
Clearing, a leading provider
of equity and derivatives
clearing services. He is
globally responsible for
the management and
development of prime
services to institutional
investors and alternatives
investment managers, with
a specific focus on arbitrage
strategies, relative value,
equity L/S and CTA.

6 H F M W E E K . CO M

THE FACTS
According to HFMWeek in
April 2016, top custodians and
prime brokers shed 1,000 clients
in 2015. Depending on their
own capital ratio constraints,
individual prime brokers have
reacted to different clients in
different ways. This was largely
dependent on how the funds strategies affect the
banks balance sheet and how these impact the overall
return on equity.
Yet it would seem few of the larger banks have
stopped to look at the longer term implications of cutting off the oxygen supply to smaller, newer managers.
From the point of view of the end investor, this current
situation suggests that they may find themselves only
left with the larger hedge funds to allocate to.
This is fine if performance is strong. Cyclicality in asset management suggests the larger the funds, the more
likely that performance eventually fails (and so fees
will not be justified). If this is correct, then closure or
redemptions are more likely to follow. Could the shutdown of Perry Partners flagship fund after 28 years and
peak assets of $15 billion be a sign of things to come?

WERE HERE TO HELP


ABN AMRO Clearing has built its prime brokerage
business around certain selective strategies where it
can offer financing in combination with an unmatched
correlation haircut model, as well as global market access and wide product coverage. Capital efficiency,
by managing collateral from a central point and being
able to offer execution (via Global Execution Services), custody and clearing and financing, are some of
ABN AMRO Clearings edges. Leveraging on in-house

FUND SERVICES

built risk tool, clients benefit from capital efficiencies


through position netting across different asset classes
(equities, commodities, FX, etc.). All of this helps to
reduce costs for cash-based prime service offerings in
an environment where there is pressure on fund performance, pressure by investors on fees, as well as the
additional costs of capital.
Going forward for any prime broker to succeed it
will be about leveraging efficiency. Clients want access to financing for their trading strategies and asset
protection with the same prime broker. The need for
return generating strategies has never been greater,

and ignoring the potential of the smaller manager is a


wasted opportunity. Less encumbered institutions are
able to take advantage of this new reality to give the
next generation of managers what they need at a price
they can afford.
ABN AMRO Clearing is sensitive to the fact that
smaller managers need infrastructural support. We
have a history of nurturing new initiatives in true partnership with our clients, and are committed to support specialised managers. This fits our ambition, as
a sustainable, global prime broker, to make our clients
globally competitive. Q
H F M W E E K . CO M 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 WinstonRepp spent most of her


career in the electronic
brokerage space. She is
an accomplished sales
executive affiliated with
Interactive Brokers LLC.
Previously Winston-Repp
worked at Bloomberg
focusing on its Tradebook
execution services.

Amanda McLean has


over 24 years experience
in the financial industry
working in her formative
years for D.E. Shaw & Co.
and Morgan Stanley & Co.
servicing large institutions.
McLean currently works
closely with global
institutional hedge funds,
wealth managers and
institutions at Interactive
Brokers LLC, introducing
them to IBs global clearing
capabilities, products and
services.

Brett Goldstein
has been with Interactive
Brokers for almost five
years, serving as director of
Hedge Fund Sales, US West
Coast. Prior to IB, Goldstein
was a director of Sales for
Citigroups Prime Brokerage
business, primarily working
in San Francisco along with
his tenure in Hong Kong.

8 H F M W E E K . CO M

n an ever-shifting regulatory and competitive landscape how are institutional asset managers supposed
to find a long term partner? Existing managers and
especially new fund managers were once embraced
and coveted by bank-owned prime brokers. All too
frequently, managers find they are being squeezed
out of the industry by primes under pressure to free up
their balance sheets, especially due to Basel III regulations.
How will the current and next generation of highly
skilled asset managers apply their skills and perform their
jobs without the support of an institutional quality custodian and prime broker?
Interactive Brokers LLC (IB) remains committed to
helping institutional clients with transparent prices and
terms for clients. IB provides a unique turnkey solution
where clients, large or small, are all welcome regardless of
AuM, trading style or pedigree.
Three members of Interactive Brokers Institutional
Sales Team present the following five FAQs from clients
and prospects:
HFMWeek (HFM): How can I maintain access to
global markets across various products and potentially improve trading performance, particularly during
periods of heightened volatility?
Interactive Brokers provides direct market access to 100+
markets with the ability for the fund manager to real-time
margin and position monitor on a 24-hour basis. As part
of IBs global offering, the firm offers portfolio margin for
institutional accounts that qualify, and managers can trade
a variety of products, including equities, options, futures,
fixed income distressed and high yield, as well as commodities and currencies through one universal account. In
addition, the firm provides 60+ order types and algorithms
that allow traders to manage their trade workflow under a
variety of market conditions.
The algorithms are designed in-house, and seek price
improvement and to limit market impact under all conditions. The strategies allow for customisation by the fund
manager with the ability to set volume percent settings,
customise time and size increments and in some cases set
a level of urgency.
Some strategies work well for stock trading with wider
spreads while others trade VWAP style and provide a

smoothing effect in sideways markets, but become more


aggressive when market volatility picks up to ensure the
order is filled. All the strategies weigh the importance of
best execution and price improvement with the need to fill
the order.
Active managers should look for a prime broker that
does not internalise order flow and does not sell order flow
as those practices potentially impact performance and, in
some cases, in fast markets, create latency in receiving executions. Interactive Brokers is one of the few brokers who
neither sells client order flow to large hedge funds and high
frequency traders, nor internalises client order flow.
IBs algo strategies tap into multiple ECNs and exchanges as well as take advantage of dark pool liquidity
only when the order becomes marketable and only if the
manager can receive the best price available, (NBBO) or
better. Orders are never left in dark pools and all strategies
attempt to employ forensics anti-gaming logic to protect
the manager from HFT and other market predators.
This means the manager has the opportunity to implement a portfolio strategy without falling victim to slippage,
latency or the fear that his or her hard work in stock selection has been sold to the highest bidder.
IBs Accumulate/Distribute algorithm for block orders
takes things a bit further by offering managers the ability
to create their own unique custom algorithm based on a
variety of user-defined conditions.
Lastly, managers can use IBs transaction cost analysis
reporting functionality to actively evaluate and tweak their
performance across venues, providing the opportunity to
adjust accordingly.
HFM: Does superior technology provide a competitive advantage?
Direct market access and best execution through IBs proprietary SmartRouting technology helps limit market impact and secure liquidity quickly at the best possible price.
Systems that are routing to trade desks and brokers merely
create latency. The more mouse clicks it takes to route an
order, the more latency involved in securing a fill; hence
the short fall. You never want a system that cannot offer
direct market access and real-time portfolio monitoring.
Real-time monitoring is imperative as no manager wants
to face a day when they are do not know their risk exposure. As for mobile access; you need to be able to monitor

FUND MANAGEMENT

exposure and positions outside the office. Make sure your


system is multi-user with a high level of security and access
levels that can be modified by user.
HFM: How do I control my operational costs? If I save
such a meaningful amount of money with my prime
broker, will I lose access to core services?
In your search for a reputable custodian or prime brokerage firm, ask your provider if they have monthly commission minimums or custodial fees. Make sure there is no
trading or AuM expectation out of the gate. Dont allow
them to say it will be evaluated monthly without spelling
out all of the costs and expectations. Selecting a respected firm is similar to finding a life partner. The fund manager does not want to worry if the firm is going to send
you divorce papers six months down the road because
he or she did not grow fast enough or if your commission wallet is no longer meeting the brokers profitability
requirements. Make sure the firm is self-clearing so you
know you are not getting prices marked up from some
other clearing entity.
IB is a custody and prime brokerage solution where clients receive great value at an extremely competitive cost.
IB is a full service clearing firm offering access to a variety
of key areas to complement the managers day to day workflow. Clients have direct access to a well-respected stock
loan desk, voice trading/block desk, soft-dollar team, capital introductions platform, training team, dedicated API/
FIX specialists, dedicated institutional client service teams
in the US, Asia and Europe.
Lastly, make sure the clearing firm is integrated with
your tax, portfolio performance and fund administrator
providers so you do not have to focus on processes that
should be automated. Emerging managers want to especially focus the majority of their time on performance,
strategy and capital raising.
HFM: Where can the emerging manager thrive today
with so many competitors placing resources outside of
traditional prime brokerage services?

This point is imperative for an emerging fund: your clearing firm needs to be 100% committed to supporting your
strategy so that you can spend the next year building up
a track record; which was your mission in the first place.
A few key signs of support might be: a) your prime
broker compensates you in a transparent and automated
fashion for lending long positions which are hard-to-borrow; b) your prime broker provides consistent depth and
breadth to meet stock loan needs at a fair price (typically,
Fed Funds Effective overnight rate minus 25 basis points
for easy-to-borrow names); and c) provides access to fairly
priced financing (typically, Fed Funds Effective rate plus
25 basis points).
HFM: In what ways can my prime broker, as a strategic partner, help me raise assets and brand my strategy
to the investment community?
Ask your broker if they have access to capital raising facilities which they broadly provide at similar levels, to all
of their clients. Or if they most likely only market to their
most profitable clients. Interactive Brokers provides an automated platform to fund managers who have the ability
to post their historical performance, as well as information
about their fund to IBs Hedge Fund Capital Introduction
site. The website is made available at no cost by IB to our
high-net-worth and institutional clients, filtered to permit
access by accredited investors, QIBs and other wealth
managers interested in hedge fund investments. More
importantly, ask your clearing firm what percent of their
funds have received some kind of capital investment. The
more automated the process, the more you can focus on
performance and trading.
The Institutional Asset Management world is changing for the largest and most well-respected hedge funds
and advisors, all the way down to the smallest hedge fund
and advisor start-ups. Many global banks and brokers are
reducing staff, support and access to their prime brokerage and custody platforms while increasing corresponding fees. In contrast, IB is in growth mode. Check out our
complete offering at ibkr.com/hedgefunds. Q
H F M W E E K . CO M 9

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Jack D. Seibald
Managing Director,
Global Co-Head of
Prime Brokerage Services
516.746.5718
jack.seibald@cowenprime.com

www.cowenprime.com

Michael S. Rosen
Managing Director,
Global Co-Head of
Prime Brokerage Services
516.746.5723
michael.rosen@cowenprime.com

Kevin LoPrimo
Managing Director,
Head of International
Prime Brokerage Sales
44.20.7071.7555
kevin.loprimo@cowenprime.com

Penn Miller-Jones
Managing Director,
Head of
Prime Brokerage Sales
212.419.3949
rpmj@cowenprime.com

Member: FINRA, NFA and SIPC

FUND SERVICES

PRIME BROKER 2016

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

S
Nick Briscoe is
director of Institutional
Sales at Invast Global,
specialising in global listed
and OTC derivative markets.
He has an engineering
background and specialises
in combining technical skill
and knowledge of global
markets to offer optimised
prime services solutions
tailored to clients.

pend time reading any high quality, buy or sell


side focused industry publication these days
and you could be forgiven for thinking that the
financial world as you and I know it, is coming
to an end.
Central banks are effectively dominating
markets, soaking up alpha and forcing investors into the
cheapest possible beta, while they crush the risk-free rate
towards a number that very frequently begins with a minus
sign. Almost every asset class has proved to be remarkably
adept at wrong-footing some of the absolute giants of the
investing landscape let alone the
talented, but still emerging, future
stars. And, last but not least, regulators globally have the wind at
their backs post-GFC, imposing
severe restrictions on who exactly
a traditional bank can and cannot
deal with, what products that bank
is able to provide reliable pricing
to the client in, the terms under
which their relationship must
be conducted and (indirectly)
just how much the bank needs to
charge that client to which the
answer is always: lots more!
Describing this present situation as sub-optimal for
fund managers would be an understatement, right?
Or is it?
I would argue that these changes have created a positive
environment, particularly for emerging managers. Innovative non-bank providers are being given space to grow
as the banks contract. It is a new era, and the most astute
managers are moving with the times, embracing the nonbank providers and are being rewarded with more flexible
conditions, often lower fees and better service.

Despite how dynamic that job was, despite the extra


glint of attraction it sparked in the eyes of women in bars,
despite the genuine rush of fear it sometimes generated, I
decided one day to change course and accept a job in the
air freight industry. Essentially this meant significantly less
time upside down, significantly more professional time at
work, and, of course, significantly less interest from women in bars.
Quite a change.
My new role involved the delivery of time sensitive,
valuable goods to clients within a hugely complex logistical chain mostly in the middle of
the night. These valuable goods often included massive boxes of live
grasshoppers to interstate pet stores
(which were presumably fed to other, higher value members of the pet
store food chain) and entire aeroplane loads of packaged blood to be
transported to regional hospitals.
Barrel rolls were a distant memory.
The aviation industry was diverse, challenging, at times humbling but most of all, hugely rewarding although not so much in the
financial sense! Whenever any of my current colleagues or
clients discover my flying past, the seemingly universal response is: What are you doing sitting behind a desk working in financial markets?!
The simple, but often unspoken answer to that question
is; change. I like it.

TO IMPROVE IS TO
CHANGE; TO BE PERFECT
IS TO CHANGE OFTEN

Winston Churchill

WHAT I DID AND WHAT I DO


I previously flew aeroplanes for a living. My first job in the
industry was flying an assortment of former Chinese, Russian and French air force aircraft, along with taking passengers flying in a two seat version of the Red Bull Air Race
planes so they could experience what it was like to pull 8 G
and later brag about it. Needless to say it was a pretty cool
job, one which I probably would have done for free.

RESISTING CHANGE IS NATURAL, BUT NOT LOGICAL


As humans we mostly seem to be hard-wired to avoid
change as much as possible, and frankly, the financial industry resists and fears change more than most. Something
about the relatively high remuneration and cut-throat culture tends to make any disruptions to scheduled programming especially scary.
What particularly surprises me about this point of view
is that almost everyone in this industry gets paid by exploiting change! The equity manager makes returns from the
market finally catching on to the earnings growth change
she was forecasting six months ago. The market maker gets
paid from truly understanding changes in liquidity on the
H F M W E E K . C O M 11

PRIME BROKER 2016

bid and offer. The FX trader gets paid from understanding


flow and positioning changes better than the market and
the fixed income manager gets paid from understanding
that errmm central bankers only know how to cut rates
and thus they will never change?
So, back to the supposedly sub-optimal current situation and in particular, a prime brokerage landscape that is
changing daily...
The major, systemically-important banks are in a regulatory-enforced retreat. Their world has changed and every
activity they perform is weighed carefully against how
much balance sheet it consumes and the return it generates. We all know this to be true because most of have witnessed these changes occurring right in front of us since
the GFC.
What is less obvious is that while a regulatory reform
process that is scheduled to extend through 2019 and
beyond continues to impact the traditional banks, a significantly more dynamic and responsive group of industry
participants has emerged to take their place the nonbanks.
These non-bank entities are expanding across the service, product and value chain that was previously dominated by the major banks. The top tier of these non-bank
organisations are highly professional, well-capitalised and
supremely focused on delivering exceptional service levels
to clients.
Far from being a poor cousin to a traditional bank facility, I would suggest that for clients of this top tier of specialist firms, the change has been a refreshing experience.
US
Take my firm Invast Global; we are a leader in providing
non-bank prime services to brokers, hedge funds and proprietary trading firms, focusing particularly on customisable eFX liquidity and direct market access to global equity
markets with leverage and borrow. Notably, we also have
1 2 H F M W E E K . CO M

FUND SERVICES

a 56-year history in global FX and securities markets and


provide clients with the transparency of being listed on the
Japanese stock exchange.
We are a company that has embraced change by utilising and providing our clients with leading edge technology but we also stay true to the conservative culture that
has allowed Invast to prosper throughout the many cycles
it has encountered in our long operating history.
Clients of Invast Global have access to a range of established bank and non-bank liquidity providers, a dedicated
API team, bespoke reporting capabilities, highly advanced
trading platforms, a 24-hour trading team for outsourced
execution, flexible account conditions, direct connectivity to global equity markets and the ability to trade multiasset strategies all through a single facility.
Invast is far from alone. If we look out to another sector
banks previously dominated, liquidity provision, we see a
growing trend for exceptionally smart, technically astute
and highly specialised market making firms that continue
to grow their market share in both listed and OTC markets. In most cases these firms provide a different dynamic
to bank liquidity in that they are trading over varying time
horizons and have an ever expanding appetite for taking
smart risks once again something banks previously regarded as their value add for clients.
So if youre reading this publication, youve likely established, or are in the process of establishing your funds
reputation for being an innovator in financial markets and
taking intelligent risks. Youve also no doubt embraced
and profited from changing market dynamics.
Changes in the prime services sector should be approached in the same way. The reality is, the industry has
evolved and the banks are now no longer the bastions of
prime services they once were.
So my message is simple, dont fear the changes that
dominate our world right now. Find the right companies
to partner with, and embrace it. Q

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PRIME BROKER 2016

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

N
Sean Capstick is
director, head of prime
brokerage at Global Prime
Partners. He joined in 2015
from RWC Partners, Equity
Asset Manager. He previously
worked on the Sell Side for
over twenty years, most
recently as European head
of Prime Brokerage at Bank
of America Merrill Lynch. He
had a series of senior equity
and prime brokerage roles
at Deutsche Bank, Morgan
Stanley and Goldman Sachs.

14 H F M W E E K . CO M

o one likes the Dear John letter. No one


likes to be dumped. But in the increasingly
regulated world of bulge bracket investment banks and their prime brokerage businesses, the dumping of smaller clients is a
fact of life and is only accelerating. And as
Kubler-Ross taught us, the several Stages of Grief that
follows could be a long and bumpy road; from the initial
shock, then denial and ultimately depression before eventually moving on to acceptance.

increasing regulatory pressures. Banks are forced to


evaluate the return on assets (ROA) of their clients and
imposing tougher restrictions on bank capital and liquidity.
To remedy the situation, a fund can always try and work
more closely with their PB to help them meet their required ROA and make more efficient use of their balancesheet. If this is not successful, then the final solution may
be to migrate the business to another PB. Hopefully, this is
a PB that is as keen to do business with the manager as the
manager is with them. One that can ideally move quickly
and work within a tight off-boarding deadline. You cannot
stress this enough on-boarding times vary hugely across
the market; more nimble providers can be live with a client
in a number of weeks and thus reduce any business-as-usual interruptions, minimising the burden on the operations,
legal and technology functions at the fund.
ARE YOU VULNERABLE?
How do you know if your fund is about to be removed
from your PBs book of clients? What are the warning
signs? Take this simple test to see if your fund looks vulnerable and needs to potentially find a new home.

WHY ARE THE LARGER PBS CUTTING SO MANY CLIENT


RELATIONSHIPS?
Tighter regulation, Basel III and a renewed approach to
return on assets, return on balance sheet, etc., to returns
generally, are forcing many of the traditional bulge bracket
prime brokers to re-evaluate their book of hedge fund clients. Banks are looking at all the revenue streams from a
client and will remove those not meeting their minimum
thresholds. Once it was acceptable for a client to pay its
prime broker for traditional financing, stock borrowing
and so forth alone, now the expectation is a hedge fund
pays its provider across multiple revenue channels and the
hurdle rates have moved up. It seems unlikely those hurdle
rates will come down any time soon.
Being assigned a low priority can manifest itself in various ways. Perhaps a fund may not receive the day-to-day
care and attention they were hoping for on the operational
side. So, for example, enquiries are not dealt with in a timely manner. As things become more severe, short positions
may be re-rated and recalled more often than anticipated,
or even not covered at all. The margin-loan book on the
long side may even be re-priced. Access to scarce resources, such as new issuance allocations, may become limited
or non-existent.
Ultimately, fund managers may be cut by their PB
altogether, which is happening more and more as major
banks focus on their core clients due to these ever-

1. Who is your prime brokerage sales coverage?


a) The very senior managing director who you met as part
of your PB beauty parade
b) Another member of the PB sales team
c) Only access is to the client service team
2. Where is my client service supported from?
a) London or Paris, the PBs main location
b) Another city, not the PBs main location
c) An offshore location
3. What client service support are you getting?
a) Responsive, high-touch, rapid turnaround to my request
b) Low touch, takes time to get my requests sorted
c) My client service is a call centre
4. Stock lending
a) I get decent access to hard to borrows
b) I get re-rated and recalled on positions
c) I get no access to hard to borrows
5. Emerging markets/fixed income
a) I get offered financing on my emerging markets and
fixed income positions
b) I get no access to leverage on my emerging market and
fixed income positions

FUND SERVICES

6. Pricing
a) My pricing has stayed stable
b) I have been re-priced
c) A minimum fee been imposed on my account
7. Revenue wallet
a) My PB offers more services because Im a good payer
b) My PB refers to me increasing my holistic revenue payment to the bank across all the different business silos, not
just prime brokerage
If the answer to any of the above was either b or c then
there might be cause for concern. This tells you that your
fund might be ranked low down on the client roster, potentially edging closer to the target-list in the next round
of culling. But dont get caught off-guard the above questionnaire has helped identify the risks and skip past the
various initial Stages of Grief straight to Understanding.
Getting to Acceptance shouldnt be difficult; regulation is
only getting more and more onerous and hence its easy to
see how this trend is only likely to continue and potentially
even accelerate.
So then we need to get on to Moving On choosing a
new prime broker. One that is in it for the long-haul, one

that values the relationship.


At Global Prime Partners, we have grown up for the
last eight years as a non-bank prime broker, offering a full
suite of financing, technology and execution solutions
specifically for the smaller hedge fund. We are not
regulated as a bank and are not constrained by the same
return criteria as our bulge bracket peers.
WHAT TO DO NOW?
If you feel you are about to get the heave-ho then Global
Prime Partners would like to talk to you and learn more
about your business. We offer:
1. Broad financing capabilities, with an appetite to look
at emerging market and fixed income securities
2. High touch client service. Our team will pay close personal attention to your account. We will call you back.
We will not send you to a call-centre.
3. Confidence in access to a secure inventory of stock
borrows
4. Swift onboarding to the Global Prime platform. This
can be completed in weeks not months.
Dont get dumped. Get even. Call Global Prime
Partners now. Q
H F M W E E K . C O M 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

T
Jack Seibald is global
co-head of Cowen Prime
Services, LLC. He was a
co-founder and managing
member of Concept Capital
Markets, LLC until its
acquisition by Cowen Group,
Inc. in September 2015. He
has been affiliated with the
firm and its predecessors
since 1995, and has
extensive experience in
prime brokerage, investment
management and research
dating back to 1983.

16 H F M W E E K . CO M

his year is on track to be the first since the


fallout from the financial crisis, during which
assets invested in hedge funds will end the
year below where they began. Lagging performance through the first half of the year has
led to further investor disappointment and in
redemptions, most notably from several high profile pension funds. Start-ups this year are also running at a much
slower pace compared to recent trends, while funds closing down are proceeding at a faster clip. How did we get
here, and how do we reverse these conditions?
Its no secret that hedge fund managers have been facing
headwinds in recent years. In my opinion, there are three
major issues hedge fund managers are increasingly having
to deal with:
1. The continuing growth of passive versus active investing
2. The relative underperformance of hedge fund returns
during the bull market since the financial crisis
3. The compression of investment management and incentive fees.
THE CONTINUING MOVE TOWARD PASSIVE INVESTING
The data clearly shows that active managers have increasingly had a difficult time beating the market averages.
We have, of course, essentially been in a one-directional
market since the post-financial crisis lows in March 2009,
which is not exactly the kind of environment thats supportive of specific security selection. In contract, purveyors of passive investment strategies have delivered in this
environment, and done so at cut-rate investment management fees. Its not surprising then that assets represented
by passive strategies continue to grow at a much faster
pace than those managed actively. Think of how easy its
become for investors to get into the market, or any subsector of the market for that matter, by simply buying an index
fund or ETF.
As recently as 2012, assets managed passively on a
global basis accounted for 11% of total assets according
to consultants PwC. That same study suggests that shares
will have doubled to 22% by 2020. The trend is even more
pronounced in US equities, where Morningstar estimates
show the passive share of assets at more than 40%. So
while actively managed assets are still projected to grow,
clearly an increasing share is going passive and thus further
out of the reach of hedge fund managers.

THE RELATIVE UNDERPERFORMANCE OF HEDGE FUNDS


Hedge funds have historically aimed at delivering outsized
returns regardless of market conditions, and have done this
through strategies that focused on delivering alpha from
longs as well as shorts, and by understanding that outsized
returns also generally required greater risk or volatility of
those returns. In recent years, however, results have been
underwhelming. From the beginning of 2009 through the
end of last year, the HFRX Global Index is up roughly 15%,
or about 2% annually over the period. While the equity
segment of the index performed a bit better over the same
time frame, this still lagged the nearly 15% compounded
annual return recorded by the S&P 500 including dividends. Performance year-to-date is similarly uninspiring.
There are obviously various reasons for such lagging
performance, but to my mind one in particular stands out,
and that is the dramatic rise in the prominence of institutional investors in hedge funds and the influence this investor class has had on manager behaviour. Its apparent to
lots of industry observers that many managers, in an effort
to attract and appease these large pensions and endowments, morphed their strategies to dampen the volatility
in their portfolios.
Essentially, these managers appear to have been retrained by these investors and the very large allocations
they make, and became satisfied asset gatherers rather than
alpha generators. Nowhere is this trend more evident than
in the amount of capital thats been put to work in liquid
alternative structures, in which managers for the most part
dont have the financial incentive to outperform.
TREND IN FEE COMPRESSION
The magnitude and the duration of hedge fund underperformance has not gone unnoticed, and investors have increasingly raised concerns over the high management and
incentive fees charged by hedge funds. The recent spate of
announcements by some large pensions that they would
be divesting their hedge fund allocations is certainly a
manifestation of their diminished interest in paying aboveaverage fees for below-average performance. The industry
has already seen other adjustments as well, including the
proliferation of founder investor classes offering allocators reduced management and incentive fees for early investments. The days of 2 and 20 appear to have gone by,
and at least from where we sit, 1.5 and 15 seems to be the

FUND SERVICES

new norm. Here again, I would suggest that the move into
liquid alternatives has played a key role in dampening fees.
WHERE DO WE GO FROM HERE?
As a former analyst and investment manager, and an investor in hedge funds, I very much believe in the concept
of outperformance, and that ultimately, performance, or
rather outperformance, matters.
In my mind, passive investing is really nothing more
than a race to mediocrity, something completely antithetical to what the capital markets are all about. More importantly, it accomplishes none of the basic objectives of investing. It doesnt provide the mechanism for establishing
the fundamental price of a business and its securities, and
certainly doesnt solve for the capital formation needs of
emerging and growing companies.
Though it has worked in recent years as the markets
have been broadly rewarding, I think its fair to question
whether it can or will survive the next bear market. I doubt
it, and believe that when that next major correction comes,
capital will again look for outlets that can and will provide
positive returns.
Its therefore crucial, in my opinion, that hedge fund
managers remember how to shoot for outperformance.
They need to again get comfortable with the simple notion
that outsized returns generally require the assumption of

increased risk and volatility in returns. Too much emphasis on risk management and not enough on performance is
a key reason, in my opinion, that the hedge fund industry
finds itself at this crucial juncture.
Nothing will make talk of redemptions and the push
back on high fees fade faster than evidence of a return to
outperformance at a time when markets arent delivering positive returns. In my view, the alpha generators will
again gain the attention of investors seeking such returns.
My simple message to those managers who have become
exquisite explainers of everything they do to mitigate
risk, is that they perhaps consider expending more effort
discussing their alpha generating strategies, delivering
on them, and remembering that growing through performance can be financially very rewarding. The goal should
simply be to be better, not bigger.
Fortunately, the industry continues to see a steady
stream of portfolio managers who very much embody the
principal of outperformance and believe that its their responsibility to aim for it, a clear sign of encouragement for
the hedge fund industry. I am also encouraged by the recent announcements of hedge fund divestment by certain
large pensions and endowments, as I see this as a sign of
capitulation by this investor class just at the time when the
downside protections typically provided by hedge funds
will be needed. Q
H F M W E E K . C O M 17

S E R V I C E D I R E C TO R Y

PRIME BROKER 2016

ABN AMRO Clearing, Gildas Le Treut, Global Director Prime // gildas.letreut@fr.abnamroclearing.com // T: +33 1 56 21 9833 // Delphine
Amzallag, Head of Relationship Management Prime Europe // delphine.amzallag@uk.abnamroclearing.com // T: +44 20 3192 9062 // Gary
John-Baptiste, Sales Director Prime Europe // gary.john-baptiste@uk.abnamroclearing.com // T: +44 20 3192 9150 // Brian Duff, Sales Director
Prime US // brian.duff@us.abnamroclearing.com // T: +1 312 604 8208
ABN AMRO Clearing is recognised as a leading provider for integrated solutions in the domain of execution, clearing, custody, nancing and risk management
across asset classes, on a wide range of markets globally. The ABN AMRO Prime Clearing service offering is extremely well t 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 rms 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 // Jack.Seibald@cowenprime.com // 599 Lexington Avenue, 21st Floor, New York, NY 10022 // Kevin LoPrimo Managing
Director, Head of International Prime Brokerage // kevin.loprimo@cowenprime.com // 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
ofces, 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 nancing
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 // s.capstick@globalprimepartners.com
Julian Parker, CEO // T: +44 (0)207 399 9450 // julian@globalprimepartners.com
Global Prime Partners is a multi-award winning nancial services rm that provides prime brokerage, execution and clearing services to hedge funds,
broker-dealers, asset managers, family ofces and professional traders. Clients are able to access the global nancial markets via its multi-asset class trading
platform, which provides trade execution, margin nancing, 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 Ofce Park, Greenwich, CT 06831 // www.interactivebrokers.com
Interactive Brokers LLC is an automated global electronic broker that caters to nancial 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 // nbriscoe@invast.com.au // Lochlan White, Marketing // T: +612 9083

1336 // lwhite@invast.com.au

GLOBAL

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
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
efcient 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 H F M W E E K . CO M

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Bespoke Multi-Asset Prime Services


This product & service is not available to retail clients. Product and services offered by Invast Financial Services Pty Ltd in Australia. For terms and conditions, refer to http://www.invast.com.au/u/legals/Spot-forex-and-CFDs-Terms.aspx.

PRIME CLEARING
SERVICES
Making our clients globally competitive.
Gildas Le Treut - Global Director Prime
Sales
Gary John-Baptiste
Europe: +44 203 192 9150
www.abnamroclearing.com

Brian Duff
US: +1 312 604 8208

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