1. CAPITAL GLOBALSECURITIES SERVICES * ORE : :
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'AY THIS FOR BI• U V11- MADOFF: HE
has been a one-man stimulus package for so-called midtier prime
brokers. "After Madoff, hedge funds wanted to demonstrate that
they used third parties and were not self-administering," explains
Ronald Fertig, COO of Greenwich, Connecticut-based hedge
fund Centaur Performance Group. Of course, he adds, a lot of
funds also opted for more than one broker after Lehman Brothers
"crashed and burned."
Hedge funds have, in fact, begun hiring several prime brokers,
giving a leg up to midtier players — chiefly BTIG, Jefferies & Merlin's Suber:
Co. and Merlin Securities — in their rivalry with such giants as Doing all a
Bank of America Merrill Lynch, Credit Suisse and Goldman, prime broker's
Sachs & Co. keytasks
Smaller hedge funds' impetus to turn to midtier brokers also
apparently stems from their feeling neglected. As large banks cut
staff, they stationed fewer, and newer,
faces on customer desks. By contrast,
midtier prime brokers, which have built Middle Path don, reporting, research and
securities financing.
multiproduct, multiasset platforms, Hedge funds are hiring midtier brokers to Perhaps the smartest per-
can mimic the product offerings of big- spread risk and reassure clients. spective belongs to Denise
ger firms while also giving customers *« BY JAJYICE FIORAVAOTE Valentine, a senior analyst
more attention. "Those $500 million to at Boston research firm Aite
$1 billion hedge funds are not impor- Group, who wrote a report
tant to the really big [prime] players," on smaller prime brokers in
says Matthew Simon, an analyst at February. "Divisions are not
London- and New York-based capital markets research firm TABB relevant," she says. "Does the entity provide prime services to a fund
Group. "So we've seen the rise of midtier primes." that has to go to primes for financing and custody? Any firm that does
The big prime brokers, not surprisingly, have a different take on its own financing and own clearing is a prime."
things. "It's a difficult landscape," says Steven Keller, head of prime Certainly, Fidelity Investments qualifies as a prime broker,
brokerage sales at BofA Merrill in New York. "Without the full although it objects to being assigned a midtier ranking. "The way
breadth of product, it's not easy to compete." Nevertheless, Keller I look at it," says the head of Fidelity's prime services unit, Thomas
concedes, "some clients are better suited to smaller providers, though Tesauro, "a firm either clears for itself or it doesn't, and that's the
as clients become more successful and their assets ramp up, they often demarcation. We're a full-service broker."
graduate to larger prime platforms." Hedge funds began seeking out Fidelity for its prime brokerage
Sheldon Rubin, COO of New York long-short firm S Squared services after the crash. "They wanted a safe place to come to,"
Technology, describes his own company's arrangement with Jefferies says Tesauro. The firm offers client service, financing and, notably,
in glowing terms: "We have a relationship with key people. It's not securities lending for shorting purposes. "We have a huge supply of
too huge an operation, so it doesn't provide inordinate attention to equities — $1.2 trillion in assets," he notes.
the biggest clients only." He praises the knowledgeable people in Using multiple brokers diversifies risk, but funds can also be
securities operations. "They can cover our shorts," Rubin says. played off against one another to tamp down fees. Yet there's one
What defines these upstart midtier prime brokers? The firms annoying downside to employing lots of brokers. Says S Squared's
squabble over which ones qualify. Glen Dailey, chief of prime Rubin, "Trying to integrate all the information from all these primes
brokerage at Jefferies, insists his firm is the only full-service mid- can be horrendous." ••
tier prime broker. Merlin Securities is too small, say some, but
Ronald Suber, head of global sales and marketing, contends that it • Comment? Click on Banking & Capital Markets
deserves the label because it performs the key functions of execu- atinstitKtionalinvestor.com.