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Hedge funds: Prime brokers reassess their strategies

Faced with increased capital requirements and regulatory changes, prime brokers are having to think of ways to become more efficient with their balance sheets.

Hedge fund launches are increasing once again. In the first quarter of this year alone there were almost 300, according to Hedge Fund Research – the third-highest quarterly launch rate since 2008. Investors are feeling more confident and appetite for risk is increasing. Marlin Naidoo, head of hedge fund capital at Deutsche Bank, says: "Since 2008 it has been hard for smaller funds to launch, but now investors are in a good place once again and are looking for new ideas. Last year we were speaking to investors who were asking for a one-year to three-year track record, starting with funds of $200 million to $500 million – those criteria have relaxed a little now."

At one time that was great news for prime brokers, which would have been jostling for clients and boosting capital introduction teams. Now, however, balance sheet is precious and they cannot lend money against illiquid assets without considering the increased costs to the entire bank. Regulatory changes are forcing banks to increase the amount of capital being held against certain risks and instruments. It is changing the nature of prime brokerage. More than ever, banks need to be aware of the cost of capital, and they are having to restructure their prime brokerage units to be more efficient.

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