IT OUGHT TO be a symbiotic relationship. "Prime brokers need hedge funds, and hedge funds need prime brokers. They may moan about each other, but it’s a marriage and it works," says an Asia-based hedge fund manager. "But this summer’s events underlined again the issues of liquidity and valuation, and some of the partners in those marriages were left wondering just how much they knew about each other after all."
As sub-prime mortgage-backed securities took a dive early in the summer, multi-strategy funds were forced to sell off their most liquid assets in order to post collateral to meet their prime brokers’ terms. It resulted in a steep drop in the equity market as positions were sold, and equity-related hedge funds in turn had to sell off sharply to meet their margin requirements. Other hedge funds that had large sub-prime mortgage exposure saw collateral seized, and...
