Choosing the best prime broker to support the strategy is vital, but will depend on the manager. A portfolio manager spinning out of a hedge fund with an established track record and experience in running a pot of capital, will likely want to appoint a tier one prime broker: the likes of Goldman Sachs, Morgan Stanley; especially if they are launching with significant AUM. They may, however, look to others as an alternate, or second, prime to mitigate risk and to provide certain outsourced services.
A true start-up, however, will likely be launching with limited capital and is going to be more cost sensitive. For them, a boutique prime or Introducing Broker that can provide a comprehensive suite of services is more appropriate.
"One of the things we have long prided ourselves on is that regardless of the manager's size and strategy, based on the menu of services we offer, we can satisfy any number of needs they might have and tailor those as the requirements evolve," explains Jack Seibald (pictured), Global Co-Head of Prime Brokerage, Cowen Prime Services.
"If it's a start-up, we offer all of the services the manager would need, including the ability to place client accounts with a number of the most highly regarded global banks that offer the asset protections and institutional recognition managers and their investors desire. The breadth of our prime brokerage solution is meant to help position a manager as institutionally sound from Day One." To see a paper that Cowen have produced on Launching a Fund click on this link.
Cowen also provides an outsourced trading solution that is fast becoming a key factor in winning new business. This solution allows new managers to limit the number of front-office personnel in the early years as they build out the business, yet still benefit from an institutional-grade infrastructure.
Managers get the benefit of an experienced buy-side trading desk that has relationships across a large number of brokerage firms, and is able to offer broader insights into stocks, sectors, and different markets. This solution is proving attractive as well to larger sized start-ups and in general to managers looking to reduce their fixed overhead.
A prime broker's technology capabilities should always be taken into account. Even if Cowen acts as the second or third prime broker it can provide consolidated portfolio reporting regardless of where else the fund's assets are held in custody.
"That's a service that is not readily made available by prime brokers," says Seibald. "In that respect, we can support a wide variety of start-ups from the very small to the very large."
He adds that when appointing an introducing broker, a principal question for any manager should be which bank(s) the IB uses to custody the fund's assets.
"It's very different if the bank is Pershing, Merrill Lynch or Goldman Sachs versus a smaller, lesser known bank. Also relevant is the range of services made available to the manager. A prime broker can differentiate itself based on the level of operational support it provides. That could include the caliber of the client service representatives that deal with all the issues involved in trading the portfolio (trade breaks, getting hard to borrow stocks for shorting etc.).
"It also includes the type of portfolio reporting made available to the manager; whether that's end of day reporting or live intraday reporting for portfolio management purposes," concludes Seibald
