Research Paper Forecasts Change in Future Prime Broker Business Model

Paladyne Systems, Inc., a leading provider of alternative investment solutions, today released a research paper exploring trends in the prime broker operating model that predicts an industry shift in the relationship between hedge funds and their prime brokers toward a new partnership model.

In its paper titled, “The Next Generation Prime Broker” -- Paladyne Systems said prime brokers are realizing they have to adapt their business models if they want to sustain the high level of profitability their parent investment banks have grown accustomed to in recent years. However, as cost pressures and infrastructure demands intensify, more and more managers are choosing to maintain multiple prime broker relationships to get best access, competitive pricing, and, to a lesser extent, non-traditional services such as middle-office support, fund administration, and comprehensive technology.

“The introduction of technology that enables multi-prime broker relationships for hedge funds is changing the very business model under which prime brokers have operated to date,” said Sameer Shalaby, CEO of Paladyne Systems. “The Next Generation Prime Broker will be one that readily partners with both competitors and independent service providers to stay in-sync with the new forces shaping the hedge fund industry.” In the paper Paladyne predicts that on average each hedge fund will have three (3) prime brokerage relationships to support their trading and operational needs, up from an average of 1.9 today.

In order for tomorrow’s prime broker to be successful and to capture more assets in a multi-prime world, Paladyne has identified a new prime broker business model with five (5) necessary requirements – essentially a roadmap to success:

Broker-neutral technology;
Independently-hosted technology;
Middle- and back-office services;
Fund administration and independent Net Asset Valuation; and,
Independent business consulting services.
Paladyne expects brokers to meet these service standards by partnering with third-party best–in-class service providers.

“Hedge funds are already rejecting the traditional captive service model in which prime brokers, offering selective services, effectively handcuff their single-prime clients,” said Mr. Shalaby. Established and even start-up funds increasingly demand such services as multi-asset trading platforms, sophisticated risk systems, lower cost IT, global markets coverage, middle- and back- office outsourcing, and fund administration. “Yet at the moment, even those top-tier prime brokers that say they can offer the ability for hedge fund clients to add multiple primes, are slow to execute.”