Hedge Funds Unhappy With Brokers' Efforts To Raise Capital

Further signs of the challenges facing the hedge fund industry emerge in a new survey of their dealings with their prime brokers. Fully one third of them are unhappy with the relationship with their prime broker, including in the crucial area of helping raise capital.

More than one-third of hedge fund and CTA managers are considering changing their prime brokers or have recently done so, according to the survey conducted by FINalternatives and Advent Software. Funds report that the main reason they are considering changing prime brokers is because they are dissatisfied with the level of personal service they are receiving, with poor competency also playing a major role.

One key finding is that, while 63% of fund managers say their prime brokers are either “good” or “excellent” when it comes to personal service, satisfaction in that area has declined markedly. Last year, 80% of funds gave their prime brokers high marks for personal service. The drop in satisfaction may be due to last year’s turbulence in the industry, as 16% of fund managers report that the liquidity crisis has worsened their relationships with their primes, the survey finds.

When it comes to capital introduction, survey respondents report that their prime brokers’ services fall far short, with 38% of respondents rating their primes as “poor” performers in the capital introduction space.

As hedge funds grow in size, so do their capital-raising needs. Over 80% of the hedge funds in the early stages of capitalization are already planning moderate to aggressive growth, and the percentage of funds planning to grow at a moderate rate expands as funds grow in size, while the percentage of funds planning to conservative growth declines to nil as funds grow in size. 

While at least 50% of the funds with under $100 million in assets under management find their prime broker’s capital introduction services satisfactory, funds with $100 million to $500 million report a dire need to improve servicing of this particular segment. Those funds in the $500 million to $1 billion category that are pursuing aggressive expansion are equally disappointed in the capital introduction offerings of their prime brokers, as are large funds (over $500 million) desiring to grow more conservatively.

The major reasons reported are prime brokers’ insufficient activity in the capital introduction space, inferiority of investors the funds are being introduced to, and the tough financial environment makes it difficult to conduct fundraising.

The observed dissatisfaction with capital introduction services comes at a time when 28% of hedge fund managers report that their prime broker has tightened margin requirements in response to the crisis. Since capital introduction is a natural substitute for margin lending in that it increases the overall pool of assets available to a hedge fund manager to invest, one might expect the funds to be more dissatisfied with the capital introduction of prime brokers who tighten margin lending requirements. An in-depth analysis reveals that this is not the case: Instead, it appears that the prime brokers that have succeeded at arranging meaningful capital introductions for their clients have subsequently tightened their margin requirements, the survey says.

 

Comments

[Dingojoe]

Gee, I bet prime brokers aren't real thrilled with their hedge fund counterparts either. I think prime brokers are a fairly finite group located in investments banks that happen to have their own problems right now, problems that the hedge funds have done plenty to aid and abet. Good luck with finding other sources you hedge fundies.

[Richard Wilson]

The problem is that lots of prime brokerage firms would love to differentiate their services by offering capital introduction services, the truth is only 1 or 2 out of 10 hedge fund managers are really sellable to the types of investor relationships that cap intro professionals can usually leverage to raise assets for their clients. I think expectations must really be managed or a prime broker must invest very heavily in several cap intro professionals with deep capital raising experience.