Blog

Top Prime Brokers and Custodians for Hedge Funds

by Simon Dhadwal

  • 26 Oct 2012
  • HF

Preqin’s Hedge Fund Analyst provides comprehensive data on the service providers which actively work with hedge fund managers to ensure the smooth running of operations and assist with regulatory matters. In this blog we examine some of the more prominent prime brokers and custodians working in the hedge fund industry.

Hedge fund managers were abruptly faced with the issue of counterparty risk following the onset of the financial crisis in 2008. This has led to an increasing awareness of credit risk, with many hedge fund managers choosing to spread their credit exposure across multiple prime brokers and mainly with the largest banks. This explains, to a large extent, why 59% of all hedge funds are serviced by the top five largest providers of execution, clearing, and settlement services: Goldman Sachs, J.P. Morgan, Morgan Stanley Prime Brokerage, Credit Suisse Prime Services, and UBS Prime Services.

In the CTA and fund of CTAs space, Paris-based Newedge Prime Brokerage is the most used prime broker with CTA-focused managers listed on Preqin’s hedge fund analyst. Approximately 31% of CTA funds on Preqin’s database are using Newedge to respond to their demands in the transaction and settlement of options and futures contracts for commodities, as well as commodities on OTC markets.

The top five prime brokers also make up the top custodians accommodating the custody needs of hedge funds. While J.P. Morgan and Goldman Sachs are the largest custodians worldwide, together accounting for just over one-fifth of all hedge funds (20.8%), HSBC has a strong presence in Asia and Europe, and the majority of hedge funds in these regions use it as a custodian.

Despite the industry being largely dominated by a few prime brokerages, there are other smaller players that are beginning to grow in terms of the number of funds they work with. Preqin tracks over 90 prime brokers and approximately 150 fund custodians. Firms such as SEB have risen in prominence in the prime brokerage and custodian markets in Europe and particularly in their home Nordic markets.

The crisis and wider events of 2008 proved to the fund management industry that the need for sound, independent third-party service providers was necessary in order to attract institutional commitment. Counterparty risk has also come to the fore of the service provider industry and investors are carrying out more operational due diligence than ever on the funds they are seeking to invest with. Selecting the right counterparties will ensure not only that a fund’s assets are safeguarded and managers receive the level of service their trading activities demands, but also that they pass the rigorous due diligence procedures of the discerning institutional market.

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