Even though prime brokerage services have been there for a very long time, their growth in the capital markets was primarily fueled by the growth of the hedge funds industry.
The prime brokerage services are utilized by hedge funds, their clients, high net worth individuals and other institutional bodies.
Since hedge funds indulge in many advanced and complex trading strategies, they require special operational needs that cannot be fulfilled by normal operational capabilities designed for vanilla trades. This is where the need for prime brokerage arises. The prime brokerage firms provide the operational capabilities to meet the complex needs of the hedge funds for implementing their strategies.
The prime brokerage services are offered by investment banks.
The term “prime brokerage” cobblers a variety of services provided to the fund managers. these activities can be divided into primary and secondary services:
- Global Custody (clearing, custody, and asset servicing)
- Securities Lending
- Margin maintenance
- Customized Technological support
- Operational Support
- Capital introduction (introducing new customers)
- Office space leading and servicing
- Risk management advisory
- Consulting (startup consulting)
The prime brokers earn money by charging fee for these different services; for example, they earn a spread on financing the client’s margined long and short cash and security positions. Similarly they earn money by rehypothecating the margined portfolios.