Hedge Funds Want More from Prime Brokers

Terry Flanagan

Hedge funds are seeking more and better technology solutions from their prime brokers for operations and risk management, in order to provide allocators with greater control and visibility via managed accounts.

“Institutional investors have the desire to allocate to emerging managers but are hesitant to do so given the inherent risks and restraints in making such an allocation,” said Brett Langbert, managing director of I.A. Englander Managed Accounts & Prime Services (MA&PS). “Or the firm is prohibited from putting in place an emerging manager program because it cannot properly deploy the infrastructure, operations, and administrative overhead required.”

Many of the hedge fund and CTA managers participating in a recent survey by MA&PS, a technology platform for emerging hedge fund managers, CTAs and investors, expressed dissatisfaction with their prime brokers’ inability to offer technology to help them more effectively manage their risk and assist them with managing and growing their business.

Brett Langbert, I.A. Englander

Brett Langbert, I.A. Englander

“The results of the survey solidified our holistic belief and thus the catalyst for launching MA&PS,” said Langbert. “Allocators of capital are investing in emerging hedge fund managers and CTAs via managed accounts. The manager responses exhibited that managed accounts present a complex workflow that requires infrastructure solutions that should be addressed by their prime brokers.”

The Managed Account Solutions platform, part of the MA&PS division, provides customized technology for firms seeking access to the alternative asset space through managed account allocations to emerging hedge fund managers.

“We sell our technology solution to both managers and allocators,” said Langbert. “It’s a brokerage model, so there are no licensing or up-front technology costs. We are providing emerging managers with a risk management platform, not only for the LP and fund vehicle, but also managed accounts. It can provide risk aggregation across any number of managed accounts.”

In a breakdown of the type of services that attracted the hedge funds to their prime broker, the survey found that the technology/reporting function was the leading service (35%) followed by operations coverage/competency (30%) and execution rates (25%).

Further, more than half (55%) of those surveyed said their prime broker doesn’t offer the appropriate technology to help raise capital for their firms, compared with 30% of the firms who said their prime broker provided this service. In addition, while nearly all of the hedge funds believe that capital introduction plays an important role when selecting a prime broker; most of the hedge funds were dissatisfied with their current level of capital introductions.

The majority of the survey respondents (75%) use managed account programs, with more than half (55%) saying their firms have benefited from these types of programs. Forty-three percent of the hedge fund managers cited relinquishing transparency to investors as the primary reason their firms did not use managed account programs. Other reasons included lack of interest, complexity, too many trades to split every day, or firms currently in start-up mode.

“The MA&PS’ business model provides a solution to the managed account equation – our offering is a unique platform in the marketplace that provides a real value add via technology, operations, infrastructure and identifying means in which allocators and managers can seek each other out,” Langbert said.

Separately, new research from Corelli Associates finds that more than 60% of institutions’ asset flows were consultant-intermediated in 2012 with the rest coming from direct sales, according to their recent survey of institutional asset managers.

“Capital markets have become increasingly more complex, and the investment opportunity set has broadened to include more complicated investment products and vehicles,” said Michele Giolitti, associate director at Corelli. “Given institutions’ growing needs, they seek more support and advice for their portfolios, which has led to an increase in the use of investment consultants.”

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