Hedge funds are relying on prime brokers for execution services as well as administrative functions when expanding into new territories, according to Matthew Simon, analyst at research and consulting firm TABB Group.
A chart in TABB’s recent study, ‘Hedge Funds 2008: Perspectives on Prime Brokerage, Volatility and Expansion’, showed that US hedge funds are increasingly expanding beyond their home market. The study added that because of the limited capabilities of hedge funds’ new satellite offices, prime brokers would be integral to providing back-office, market access, marketing and sales services to the funds in these locations.
But they will also be providing execution services. “There is a Chinese wall between the electronic trading and execution side of the prime brokerage and the administration and servicing side of the business. But they are very much correlated in the minds of the hedge fund selecting its counterparties,” Simon explained to theTRADEnews.com.
According to the report, 80% of hedge funds give more than 10% of their order flow over to their prime brokerage relationships. “What that says to me is that they are viewing them as one and the same even though the sell-side may view them as being two distinct entities,” he said.
He added that brokers are following hedge funds into new territories. “Many of the global investment banks have been moving their businesses abroad to meet a lot of those electronic trading and research and portfolio management needs that the hedge funds require as they move their offices abroad.”
TABB Group believes one out of every four hedge funds is planning to open an office outside the US in the next two years. Asia is the top of hedge funds’ list of destinations – some 68% of respondents to TABB’s survey said they were planning to invest in Asia outside Japan.
Simon points out that India and Malaysia have recently implemented direct market access. “We’re starting to see some of the more niche markets, where there is some significant opportunity, become more favourable to hedge fund-type investors and people who are really trying to capitalise on market structure change and make some money for their investors,” he said.