All About Prime Brokerage Services

Prime brokerage services are specialized services meant for hedge funds. Prime brokerage services are offered by investment banks, which offer certain core services. Interestingly, the hedge funds are not charged specifically for prime brokerage services. Rather, money is made from other means related to prime brokerage services. Usage of prime brokerage services means that the hedge fund has an integrated facility for the purpose of clearance of various securities, which the hedge fund holds. As told earlier, the investment banks bundle some services known as core services. These core services comprise a personalized interface for all users, lending of stocks, financing, all together acting as the point of contact between brokers, dealers, and the hedge fund.

Add to this, value-added services such as interaction with hedge fund investors in order to seek investments, advisory services for managing risks, property lease facilitation for hedge funds with specialized on-site services and even consultancy services for new funds.

Through a deep search in the history of prime brokerage services, you should be able to recall Furman Selz, a popular broker-dealer of the 1970s. Prior to the introduction of prime brokerage services, the task of portfolio management was a very complicated one, especially for people who had interests in multiple areas. They tracked their trades as well as attempted to consolidate their position in the market as well as looked for new tips. Furman Selz came up with the concept of an integrated service, which was successful and the financial market head honchos that included Merrill Lynch, Goldman Sachs, Lehman Brothers, Morgan Stanley and Bear Stearns quickly adapted the approach to shape it in the form of what we today call the prime brokerage service.

In the 80s and 90s, prime brokerage services were generally available for equities and related transactions. No value-added services were visible as yet. The only extras available were basic clearing processes of some bonds along with custody services. It was by the end of the 1990s that hedge funds became popular and with them the prime brokerage services reached their current position.

Prime brokerage services have their own risks. Since these services are basically all about how to leverage hedge funds by the money received via long-term loans, the primary brokerage services investment banks expose themselves to considerable risks, if the debtor is unable to repay the loan or the hedge fund's securities fall in value. While not a likely possibility, but it is still a possibility. The banks that provide prime brokerage services are also prone to the usual administrative and credibility risks, because if hedge funds lose money,due to their mismanagement, not only will the hedge funds suffer but the banks will also have a reputation crisis.