The reshaping of the prime brokerage industry

Last summer, Global Custodian published its annual survey of the prime brokerage industry which provides interesting insight on the impact of the crisis on their business and the perspective of the industry going forward, says Gabriel Kurland from Geneva-based firm Hedge Fund Appraisal in his current newsletter. Global Custodian estimates that the revenue generated by the prime brokerage has ranged from $25 billion a year to more than twice that figure.
Following last year events, one fund in three had experienced the termination of a relationship with a prime broker during the 12 month preceding the publication of the survey. This number rose to more than one in two among the larger hedge funds.
As explained by respondents of the survey, the main reasons why prime broker relationships were terminated were as follows: counterparty credit risk concern, reduced need for service and those contractual terms were modified by prime brokers. Another reason is directly linked to the run to the gate in the last two quarters of last year by investors in hedge funds was induced, in part, by the fall of Lehman Brother, one of the six leading providers of prime brokerage services.
Hedge Funds had learned in August 2007 and again during the Bear Stearns rescue that even contractually guaranteed margin terms were not sacred to prime brokers. However, in fall 2008, the leading prime brokers abandoned any pretense that anything mattered but the survival of their firm. Prime brokers effectively assumed powers of life and death over hedge funds, determining which they would support and which they would not.
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