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Prime brokerage costs up but who cares?

The average cost of using a prime broker is slowly increasing, say those in the industry, but do hedge funds really care?

A New York-based prime brokerage head says he expects that the average cost to a hedge fund manager of using prime brokerage services will increase by five to 10 basis points over the coming year. "It’s too small to have a market impact for managers," he says, "and, in any event, priorities have shifted away from selecting a prime broker based on cost."

The price increase, he says, will occur as those prime brokers that, before the sub-prime crash, were underpricing their services in order to compete, have now been forced out of the market, or forced to increase their commissions in line with the industry. "The average cost across the industry will therefore naturally be higher. There is also the opportunity for some of the prime brokerages that have proved themselves to be sturdy and loyal to clients to put up costs as demand for their services increases and capacity for new clients becomes strained." He believes that managers will decrease the number of prime brokers they have servicing them.

Stand by you

Events in the prime brokerage industry since last summer have caused managers to reassess how they select prime brokers, which is pushing them towards more established players.

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