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Custodians fight to stay the distance

When Lehman Brothers went bankrupt, hedge funds rushed to transfer assets from stricken prime brokers to the safety of custodians. It seemed a new competitor had emerged, but as normality returns can custodians convince hedge funds that they have what it takes? Helen Avery reports.

CUSTODIANS WERE AMONG the few beneficiaries of the financial crisis. Long the guardians of the assets of pension funds, institutional investors and endowments, they found the crisis opened up a whole new client base. Hedge funds, panicking over the future of their troubled prime brokers, turned to global custodians to park assets and cash, and in the process provided the custody industry with a much-needed opportunity for expansion.

The custodians didn’t waste any time. Partnerships with prime brokers were established, complementary services for hedge funds were set up, and core businesses such as securities lending and FX trading were adapted to better serve the new client base.

For a while prime brokers, which had garnered enormous profits from serving the rapidly growing hedge fund industry, looked under threat. But the panic has since subsided. Can custodians convince hedge fund clients that they are still relevant?

Unbundling the offering

The idea was a simple one. If the global custodians were luring hedge fund assets away from the prime brokers, surely there were other pieces of the prime-broking pie that could be unbundled. Prime brokerage comprises clearing and custody, research and trading, securities lending, financing, reporting and risk management, in addition to ancillary services such as capital introduction and office space leasing.

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