Prime brokers offer special services, such as lending money and securities, operational support, global custody, and technological tools, to hedge funds and other money managers. Major investment banks offer these services and make money through financing and per-item fees. The concept emerged in the second half of the 20th century and has evolved to allow hedge funds to grow and be more profitable.
A prime broker is a broker or brokerage firm that offers special services to certain clients. These clients often include hedge funds, equity specialists, and other money managers. What these customers have in common is the need to be able to borrow securities or funds in the daily course of business. Most of the large investment banks offer top-notch brokerage services to these clients.
The services that a prime broker will generally offer, in addition to lending money and securities, include operational support, global custody, and technological tools to allow the client to track portfolio positions. Operational support basically means that the main broker acts as the agent between the client and all the other brokers. The broker can do this due to the principle of global escrow. This means that the primary broker holds client assets on its behalf, as well as providing a centralized means of closing transactions and servicing assets.
Every client of a major broker will have certain technology needs related to managing their portfolio. These can be as simple as daily statements or as complicated as real-time portfolio reports, and the client must work closely with the lead agent to ensure their needs are met. Certain major brokers offer more specialized services to certain clients. For example, a prime broker may also be in the business of leasing office space to hedge funds, as well as include on-site services as part of the deal. Consulting and risk management services may be among these, especially if the hedge fund has just started operations.
The growing popularity of hedge funds has led to a higher level of competition among major brokers in recent years, and they have become a major presence in the world of finance. Clients receive numerous practical benefits by using a primary broker. Top-tier brokers typically make money through the financing they provide, as well as through per-item fees when clearing transactions.
The concept of prime brokerage emerged in the second half of the 20th century and is still evolving. When the major brokers emerged, they were immediately seen to provide huge advantages over the old system, where asset management involved tediously tracking the performance of each transaction. In this way, the major brokers allowed hedge funds to grow and be more profitable than they could have been. There is some risk involved in prime brokerage, but this risk is carefully managed and preparations for adverse market events are made as a necessary part of doing business.
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