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Concept
Prime brokerage
Summary
Prime brokerage is the generic term for a bundled package of services offered by investment banks, wealth management firms, and securities dealers to hedge funds which need the ability to borrow securities and cash in order to be able to invest on a netted basis and achieve an absolute return. The prime broker provides a centralized securities clearing facility for the hedge fund so the hedge fund's collateral requirements are netted across all deals handled by the prime broker. These two features are advantageous to their clients.
The prime broker benefits by earning fees ("spreads") on financing the client's margined long and short cash and security positions, and by charging, in some cases, fees for clearing and other services. It also earns money by rehypothecating the margined portfolios of the hedge funds currently serviced and charging interest on those borrowing securities and other investments.
Each client in the market of a prime broker will have certain technological needs related to the management of its portfolio. These can be as simple as daily statements or as complicated as real-time portfolio reporting, and the client must work closely with the prime broker to ensure that its needs are met. Certain prime brokers offer more specialized services to certain clients.
For example, a prime broker may also be in the business of leasing office space to hedge funds, as well as including on-site services as part of the arrangement. Risk management and consulting services may be among these, especially if the hedge fund has just started operations.
The following services are typically bundled into the Prime Brokerage package:
Global custody (including clearing, custody, and asset servicing)
Securities lending
Financing (to facilitate leverage of client assets)
Customized technology (provide hedge fund managers with portfolio reporting needed to effectively manage money)
Operational support (prime brokers act as a hedge fund's primary operations contact with all other broker dealers)
In addition, certain prime brokers provide additional "value-added" services, which may include some or all of the following:
Capital Introduction – A process whereby the prime broker attempts to introduce its hedge fund clients to qualified hedge fund investors who have an interest in exploring new opportunities to make hedge fund investments.
Official source
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