Prime brokerage units will reel in more revenue from hedge funds in 2008 than in previous years, according to a new research report.
In its fourth annual benchmark research study, research and consulting firm Tabb Group predicts that prime brokers will generate more than $11 billion in revenue from hedge funds in 2008 – a 15% increase from 2006.
“TABB Group estimates industry revenues generated from financing, stock loan, custody and other prime services will surpass other institutional business lines by 2010, in particular the cash equity business, which is hovering around $12 billion a year,” said Matthew Simon and Monica Schulz, co-authors of the study, in a statement.
Despite the recent credit crisis, Tabb believes the client-oriented nature of hedge funds has helped to diffuse concerns and avoid panic. Although 44% of funds reported that volatility has had a negative impact on returns, the majority of funds plan to reduce or maintain near-term exposure, according to Simon and Schulz. In addition, they are planning on a continued expansion of their business, including opening up offices around the globe – as many as 800 depending on market conditions – launching new funds and trading new markets.
“Hedge funds of all stripes and sizes are following best practices when it comes to operational functions such as investor relations and risk measurement,” said Adam Sussman, Tabb Group director of research. “This is not just a sign of the times, but an indication that the hedge fund industry has matured.”
He added that the hedge fund industry has seen significant growth over the last year. The average fund size is now approaching $4.5 billion in assets under management, rising from $1.85 billion in 2006.
The information for the study was gathered through interviews with 61 US-based hedge funds from January to March 2008. Participants had a combined $227 billion in assets under management, representing approximately 15% of total US-based hedge fund assets.