What Makes a Successful Prime Broker?

Preqin spoke to Frank Magnani, Global Senior Sales Executive, and Andrew Wilkinson, Chief Market Analyst, from US-based Interactive Brokers to find out what hedge fund managers require from their prime broker, and how offerings have evolved over time

What are hedge fund managers looking for from their prime brokers in the current market, and how can prime brokers provide value?
Frank: The prime brokerage market is extremely competitive. Whether you operate in the US, Europe, or Asia, prime brokers have to be at the top of their game to attract hedge fund managers in this current climate. Providing value-added services that hedge funds are looking for centers around four key concepts:

1. Technology and Reporting. Hedge fund managers need top-quality, real-time reporting capabilities. These include the ability to report information on their performance, either directly to the fund manager or an administrator, in addition to having real-time, online access through a portal and mobile apps. This allows managers to know exactly where they stand at any given moment.
2. Trading Platform. Fund managers want a trading system built for them that gives them the ability to trade all products across all markets – equities, ETFs, options, futures, commodities, fixed income, CFDs, and Forex. Our proprietary trading platform offered at Interactive Brokers is connected to 125 markets in 31 countries, offering managers the ability to trade multiple products in one integrated account.
3. Pricing. Of course, this is very important because managers need to keep their costs down. They require a competitive pricing schedule that suits their needs, whether that’s a tiered commission schedule based on monthly volume or an all-in fixed inclusive rate. We have no AUM requirements, nor do we impose any commission requirements on hedge fund managers, whether domestic or international.
   
   Preqin Pro ranks Interactive Brokers number one for smaller funds. While many prime brokers have stopped serving smaller clients, we are able to offer our prime services to funds of any size at the lowest cost because our platform is completely automated.[1]
4. Security. Fund managers want to make certain that their prime broker is financially sound and has appropriate risk policies in place. They want to be certain that their accounts are secure so that when investors come to make an allocation into their fund, there’s no push back.

How important are reporting solutions to fund managers?
Frank: There’s enormous demand for reporting capabilities. We live in a technology-focused marketplace and embracing technology allows for better service.

Hedge fund managers need to be able to access reports online, on demand, and in real time. This allows them to manage risk, see trading blotters, and monitor their costs. Fund administrators can in turn have access to these reports to use in their communications.

Andrew: There’s also demand for third-party integration. We offer integration with a wide array of reporting and communication companies to allow fund managers to better and more seamlessly serve their clients.

How have solutions offered by prime brokers changed in recent years? Have hedge funds started requiring new solutions?

Frank: In the past, hedge fund managers had to go to multiple service providers to obtain all the solutions they require to operate effectively. A prime broker wouldn’t necessarily have a technologically sound trading platform or risk management system, for example.

In the current market environment, fund managers are seeking out full-service prime brokers – a firm that is going to be able to offer them all the services and products that are necessary to implement their strategy. That means providing a trading platform with the ability to trade all securities across global markets, real-time financial reporting, risk management, capital introduction, and top-quality service.

When I say service, I’m referring to supporting a manager and its operational team on a daily basis – whether the manager is trading the markets in Europe, Asia, or the US across multiple time zones – as well as a thorough and tailored onboarding process. Interactive Brokers supports managers in these markets with support staff based in these locations and time zones.

What makes for a successful prime brokerage partnership?
Frank: It’s about first understanding a manager’s strategy and how the prime broker can support its strategy, as well as addressing the needs of its operational staff to ensure a successful relationship.

Throughout the onboarding process, our teams spend a lot of time with the hedge fund manager to understand its specific needs for trading and operations. Once we know the products it requires to trade, what strategies it will implement, its reporting and trading needs, as well as the requirements of its fund administrator, we customize a training session focused on its requirements.

Next is the educational side and making sure the manager is comfortable entering orders, finding the relevant analysis, and locating the products it needs. After the fund manager begins trading, it has access to our client portal where it can see confirmations, statements, and reports to continuously evaluate its operations. All of this support and training creates a robust operational platform for fund managers and ensures a successful partnership with the client.

Andrew: We certainly put emphasis on education and support beyond the launch of the platform.

Over the past two years we’ve built out our Traders’ Academy – a series of courses aimed at delivering specific education on how the trading platform works. This takes traders through how to work all aspects of the platform. From simple parts of the technology, such as placing an order or using a chart, to more sophisticated abilities, such as using some of our convoluted algorithms to help disguise your footprint in the marketplace.

We now have over 40 courses online and have also partnered with third-party vendors, including exchanges and ETF issuers, to help explain how different products work.

Frank: Another important factor here is our global approach. We have videos available in seven languages and that's a big driver behind working effectively with clients around the world. Our diverse client base of 680,000 accounts located in the US and abroad has support materials in Italian, Spanish, French, Dutch, German, and Japanese, which allows us to create strong partnerships on a global scale.

How do you think the hedge fund sector and prime brokerage services will evolve in the near future?
Frank: The key areas will be leading-edge technology focused on trading, risk, and reporting in addition to global market access.

At their core, hedge funds want the ability to execute orders electronically very quickly, using a platform that is robust and reliable. This allows them to implement their strategy whether they’re in the office, working remotely, in a meeting or traveling. This is the type of technological service that we’ve seen an increasing demand for recently. And with developments like 5G, these services will only get better.

Pricing in relation to commissions and overall costs will remain a key consideration, as it always has been. But, fundamentally, if a prime broker offers top-quality service, modern technological processes, and continuous support and access to global market centers, hedge fund managers will want to work with that prime broker.

[1] Lower investment costs will increase your overall return on investment, but lower costs do not guarantee that your investment will be profitable.

This article is taken from the 2020 Preqin Global Hedge Fund Report. For more expert commentary on the hedge fund industry, please visit: preqin.com/ghfr