In light of the changing financing conditions, alternative investment managers are working differently with their prime brokers. Most notably, they are looking for partners that are backed by the sizeable balance sheets required to extend the amount of leverage needed by the largest funds.
“As the alternative investment industry grows in scale, so too must the breadth and depth of prime brokers,” Franck Lacour, Global Head of Equities, HSBC. “A considerable balance sheet, combined with the robust risk management needed to effectively deploy it, will be a defining characteristic of the prime brokerage providers that succeed in the future.”
Another aspect of the evolving relationship between a prime broker and its clients is the way that risk is distributed across the ecosystem, which increasingly resembles a two-way street. Prime brokers not only take on risk when financing a fund, they also recycle their risk by transferring it to funds that have the appropriate risk appetite.
International expansion
Although North America accounts for around 80% of global hedge fund AUM10, the industry is becoming more global, as large funds expand into new markets – such as the Middle East. The region is attractive as it presents an attractive macro backdrop, and financial centres that are offering incentives for hedge funds and other alternatives investors to set up shop locally.
Fund managers are not only actively participating in capital markets in the Middle East, they are also increasingly deploying capital globally from the region, which is in turn driving new investment corridors – creating emerging routes of global investment that further strengthens its place as a financial hub.
The Middle East has a deep pool of capital, with large investors that have a track record in allocating to hedge funds – including large private investors, family offices, and giant sovereign wealth funds. More than a quarter of the world’s top 100 hedge funds have operations in the UAE; and in Dubai, there were 45 hedge funds with more than USD1 billion AUM at the end of 2024, a significant increase on just eight in 202011.
A widening global footprint means that hedge funds need to work with established prime brokers that can provide access to both developed and emerging markets as well as deep local insight. HSBC’s long history in not only the Middle East, but also in Asia, provides a unique opportunity for fund managers looking to geographical diversification of their prime brokerage providers.
“For investors in emerging markets, the role of a prime broker is more than enabling an investment strategy, as investors new to these markets often benefit from on-the-ground guidance in navigating local rules and regulations governing areas like market access, the use of derivative products, and local custody issues,” said Matt Kiraly, Global Head of Prime Sales, HSBC.
Market access is a case in point. To invest in China’s onshore fixed income market, for example, a fund must decide one of three access channels, each providing differing levels of access.
The Qualified Foreign Investor (QFI) programme for example, grants the broadest access, but requires a license from the regulator, while access via Bond Connect is more straightforward, but with a smaller range of tradeable securities. The prime broker can help institutional investors new to the market to find the access channel that best meets their needs.
Conclusion
Diversification is a persistent theme across all the major alternative investment trends: multi-manager funds provide a diversified portfolio for their clients, larger funds are partnering with a diverse range of prime brokers to meet their financing needs, and many funds are diversifying into emerging markets.
And at every step of the way, the prime brokers will need to expand to facilitate alpha generation and deliver services beyond liquidity and execution for the world’s most sophisticated investors.
