How Hedge Funds Are Managing Risk

by: FP Trading Desk

More than 100 hedge funds had assets frozen in the Lehman Brothers bankruptcy. It really demonstrated how important it is to know where your assets are.

Many others, like Silvercreek Asset Management, had money with another major U.S. prime broker -- Bear Stearns. However, Silvercreek was prepared and had a backup where it quickly shifted its assets as soon as the rumblings of doom started to emerge, the firm's Bryn Joynt told conference delegates.

Canadian prime brokers are owned by Canada's banks, so unless another financial crisis hits even harder here, our prime brokers should be safe places to be.

Steve Banquier, executive director, prime brokerage at CIBC World Markets, says a lot of players are pushing their less-desirable clients out. And that means more business and more opportunity to be selective for those still in the game.

There is still demand from funds for their services, but fewer U.S. prime brokers to serve them. Joynt says fund managers now have to search for a prime broker rather than these firms seeking hedge fund business as they did in the past.

After the crisis, it is becoming more common for even smaller hedge funds with just $50-million in assets under management to have multiple prime brokers. Due diligence is definitely the matter of the day, both for hedge funds seeking secure places to park assets and for prime brokers, who are giving risk committees more time to comb over the businesses of prospective clients.

Whereas it may have taken as little as a few days to a couple of weeks to sign on with a prime brokerage in the past, Joynt has had one application pending from back in December.