What is a hedge fund?
A hedge fund can use leverage, trade multiple asset classes, and have short positions. They are usually targeting high net worth individuals and charge both a service fee and a performance fee.
Growth of hedge funds
There are many different measures, but roughly total assets for all hedge funds grew to a peak of around $2 trillion in 2008, from about $0.3 trillion in 2000. For comparison, US GDP is about $14 trillion and TARP at $0.7 trillion.
The biggest hedge funds are huge. The top 10 global hedge funds each have over $10 billion in assets.
Prime Brokerage business model
In the highest level, Prime Brokers help their clients, the hedge funds, in clearing and settlement, consolidated reporting, financing and securities lending. There are other services like capital introduction, technology start up consulting, fund administration etc.
Revenues for Prime Brokers are mainly earned from spreads in long and short balance, transaction fees for clearing, and securities lending. A Prime Broker can also help bring in additional revenues to the company's various trading desks with the understanding of the clients needs.
Technology needs
Technology is an integral part of the Prime Brokerage business.
A Prime Brokerage firm uses web, FTP, FIX, SWIFT, FpML and other standards for client interfaces. It leverages firm wide referential data like pricing, product and account information. It interfaces with front offices, middle offices and back offices for position keeping, pricing and settlement. It works with other firm wide system for risk, compliance and funding. PB technology also provides margin, client risk, accounting, custody and data integration functions. It provides post-execution trade processing and allocations. It interfaces with the firm's general ledger and client sub ledger systems. All of these are done to support the global markets with large daily trading volume. Data snapshots are also needed to generate month-end reports.
It is very critical for a prime broker to provide accurate and timely information to all of their global clients in their local timezone. For example, a London based hedge fund should get the consolidated reports and data feeds for all their positions by local 7am, or 2am EST. A Tokyo based hedge fund will need their data by 7am, or 6pm EST. Different strategies and technical designs can be used to address this business requirement by different Prime Brokers.
In a nutshell, technology projects in PB are done to satisfy any of the following business needs
- Improve operation efficiency
- Scalability of systems to maintain SLAs with clients ongoing volume growth
- Improve business offerings to retain existing clients and win new business
- Responding to new industry initiative and trends
- Internal risk measurement and control
- Support and serving existing clients
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