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CAPITAL MARKETS

Prime brokerage: Primed for expansion again

Three become five as clients choose multi primes; JPMorgan expands Bear Stearns’ platform

As hedge funds began to boom up to 2007, prime brokerage was the business to be in. Wall Street firms were expanding their offerings and there was a surge in small independent prime brokerages establishing themselves to serve the small and medium-sized funds that the large firms viewed as not worth bothering with.

For the majority of firms, that burst of expansion drew to a halt over the financial crisis of September and October 2008 as the number of hedge funds declined and some of those remaining cashed out and sought comfort with custodians. An estimated 450 hedge funds controlled 85% of all hedge fund assets in 2007. That number has since dropped to 300.

Now that the world economy appears to have come back from the edge, prime brokerage is back at the top of the list, and the competitive landscape has changed. Jonathan Hitchon, co-head of global prime finance at Deutsche Bank, says: "It’s not back to the good old days of tons of prime brokers scrambling for business yet. The cement seems to have set in terms of four or so prime brokers picking up the lion’s share of hedge funds, and then small outfits hoovering up the smaller funds."