Matt Simon, analyst at Tabb Group, says that the market share of the top three prime brokers: Goldman Sachs, Morgan Stanley and JP Morgan, has dropped to about 50% vs. 70-80% five years ago. He attributes it to hedge funds seeking diversification due to the exits of Lehman Brothers, Bear Stearns and Merrill Lynch. Turns out bigger may not be better and some new players are looking to get in the game.
For example, TradeStation launched a prime brokerage services division on Sept. 24, in an attempt to fill a void for small and mid-sized hedge funds and investment advisors. TradeStation Prime Services will provide execution platforms, clearance and settlement of trades and portfolio reporting services.
“Many of the larger prime brokers don’t like having smaller funds as clients because they’re not profitable,” says Simon. “Hedge fund assets have dropped over the last year and there’s less business to go around. You have a smaller industry with more players, and because of that, it’s going to be challenging for the new entrants.”
Troy Buckner, managing principal of NuWave Investment Management, says that the most important issue for hedge funds in choosing a prime brokerage is the strength of the balance sheet and the depth of organization. He says it will be difficult for TradeStation’s prime brokerage to attract medium to large hedge funds, but it could do better with the smaller hedge funds.
Hot New CTAs
In our Hot New CTAs feature we failed to mention that CTA Ascendant Asset Advisors had several option writing programs that had significant drawdowns in 2008, some losing nearly all of their assets. Those programs are completely unrelated to the JLD Managed Futures trading program we featured.