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Prime brokers revamp to survive as their clients thrive

Prime brokerage revenues are under pressure but increasing investor appetite for hedge funds means that staying in business is a priority. So prime brokers are rethinking their models.

The good news for prime brokers is that their clients are thriving. At the end of the second quarter this year, hedge fund assets topped $2.2 trillion, according to Hedge Fund Research. More than 300 hedge funds were launched in the first quarter of the year, taking the estimated number of hedge funds and funds of funds to 9,647 – just shy of 2007 levels.

The bad news is that although there are more managers, fewer are using leverage and fewer are trading. HFR estimates that annual prime brokerage revenues have dropped $3 billion over the past five years to $12 billion.

That means some financial institutions have had to rethink whether or not prime services is an area that they can afford to compete in. Those that can’t are exiting the business. But it’s not an easy business to walk away from.

Relative to investment banking revenue declines, falls in prime brokerage revenues are small. According to Dealogic, global DCM revenues for the first half of this year were 21% down on the same period in 2007. ECM revenues were down 41%. M&A revenues were down 37%. Prime brokerage revenue levels were flat to slightly up for the same period, analysts estimate.

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