All business relationships are driven by the belief that both sides will receive a mutual benefit that will allow for a long term sustainable partnership between both firms. For a prime brokerage / alternative asset manager relationship this principle is no different. An alternative asset manager (“AAM”) looks for certain services from its prime broker (“PB”): financing, access to balance sheet, securities lending, capital introduction, research, corporate access, technology and other services that are essential to the AAM as it deploys its strategy. PBs are looking to generate an attractive after cost return based on the revenue generated from the client vs. usage of financial resources such as balance sheet and capital.
Driven primarily by post financial crisis regulatory pressures, banks and prime brokers are being faced with significant new requirements, which have changed the client interaction dynamic and has led to changes in balance sheet allocation, business objectives, and capital markets activity. While the fundamental nature of the business relationship has not changed between hedge funds and PBs, AAMs need to understand the impact of regulation on the PB business and how best to optimize their impact on the prime brokers’ balance sheet in order to optimize the overall relationship.
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