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Best Prime broker: Goldman Sachs |
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Also shortlisted: Citi and Deutsche Bank |
Until the credit crisis, Goldman Sachs was consistently in the top-two prime brokers that hedge funds used. When the crisis hit, however, funds looked to spread their counterparty credit risk by moving to four to five prime brokers, opening up the competitive landscape. Several years on, though, those prime brokers that invested to pick up the shared wallet have withdrawn, finding the costs too high and pressure on revenues too tough. In addition clients began to realize the inefficiencies of dealing with several prime brokers and began in 2010 to return to a smaller number. Within the two or three typically used, Goldman Sachs is consistently a choice. It wins this year’s best global prime broker award.
“We really benefit from having that historical strength,” says Dean Backer, global head of sales and co-head of capital introduction in global prime services at Goldman Sachs. “We have a core platform that is tried and true, and we’ve been committed to prime brokerage for so long that, even with the changes in market conditions or regulation, we have just continued to build our consultancy and capital intro efforts and develop the platform.” The firm’s consistency has also remained at a senior management level, whereas many of its peers have seen higher turnover as they have jostled for position over the past five years.
Marc Gilly is global co-head of capital introduction and head of the prime brokerage client franchise in Europe. He says that management structure has been imperative in providing clients with a high level of service. “The global structure means that we aren’t tribal about regions. European clients in the US receive as much attention as US clients in Europe and Asia, and that is important: having a consistent offering in every region. For example, more than half the London or Hong Kong team when it comes to capital introduction is serving US hedge fund managers.”
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| Dean Backer, global head of sales and co-head of capital introduction in global prime services at Goldman Sachs |
It has been a challenging market, however. The hedge fund boom ended abruptly in the crisis and has been slow to return. It has been harder to set up a hedge fund, says Gilly: “Funds need financial backing, a proven team, and even then it is a case of investors’ choice.” The number of $1 billion launches, for example, is low. “We try to manage the expectations of our clients rather than sell them a dream and convince them to launch when it is inappropriate. We are certainly more cautious than some prime brokers.” That environment, however, is changing. According to Hedge Fund Research, launches in the first quarter were the third highest since 2008 as investor tolerance for risk increases.
Backer says: “There is definitely a turn for the better. We are seeing a good number of important new launches queued up for the remainder of the year and into early 2014, and we haven’t witnessed that kind of movement in a long time.”
The cyclical market environment and more recent regulatory changes mean that clients are looking for both operational stability and a prime broker that can provide new services. That is where Goldman Sachs excels over its peers – by having both. The firm is a leader in maintaining confidentiality and meeting core demands for functionality and smooth execution and stock loans, but also at offering value-added services such as capital introduction, risk management, financing, consultancy and services to ease regulatory burdens. Consultancy includes advice and support around business planning, infrastructure and staffing.
The firm has procured resources and experts on staff to help clients better understand how regulation affects their businesses. These resources reside within prime services and more broadly throughout the firm. Backer says: “The move to a more centralized clearing system for most OTC instruments over the last year has been significant. To best position ourselves and help clients, we have prime brokerage, clearing and the futures businesses under a common umbrella within prime services, and the ability to group these business together is helpful for clients when it comes to the account-opening process and other important operational functions.”
When it comes to capital introduction, Goldman Sachs is able to get its clients in front of meaningful investors. “It’s easy to talk to hedge funds of funds and get clients in front of them, but the challenge is getting institutional investors to take your calls. It’s a crucial source of capital for clients and they require twice as much time, so we have made hires that have inroads into and experience with the best institutional investors out there,” says Gilly. “Everyone has an investor list, but it’s about how well you know them. We have access to the CIOs as we have senior people here in capital introduction.”
Gilly says above all hedge fund clients feel comfort in dealing with Goldman Sachs in prime brokerage. “Our firm – including senior management – understands the hedge fund business because they’ve been an important client constituent for a long time.”
