Hedge Fund Marketing and Prime Brokers

December 20, 2010

Until recently, hedge funds that lacked the resources to hire their own marketing teams often relied on small, independent third-party hedge fund marketing companies to introduce them to big investors.

But that’s changing rapidly, according to a recent article in Investment & Pensions Europe. In the last few years, large prime brokers are muscling into to the market and developing capital raising departments of their own. Deutsche Bank and Goldman Sachs are two of the more prominent firms grabbing a chunk of the marketing action. This push is driven by both the competitive nature of prime brokerages and a desire to add value for clients. But they also stand to gain hefty brokerage fees for any assets they bring in the door, as well.

What complicates matters is pricing. Prime brokers can afford to offer their capital introduction services essentially for free, given the fees they stand to gain on the back end. However, independent third-party marketers charge a percentage of the performance of assets they introduce to hedge funds.

Third-party marketers live and die by their reputation at picking top performing managers, and providing a more specialized service. Whereas prime brokers may have a stable of hedge funds they represent and share them all with potential investors, without showing any preference for one hedge fund or another.

It’s an increasingly crowded market served by investment consultants, such as Watson Wyatt, as well. Watson Wyatt has a team of eight professionals who research and provide due diligence on hedge funds. The firm touts their impartiality as a key selling point. “We’re in a position where we have no axe to grind,” says Stephen Oxley, a senior investment partner at Watson Wyatt. Large institutional clients pay similar fees if they were selecting a traditional fund manager.

The price war is expected to continue between prime brokers who offer the service as an add-on and those who specialize in high quality capital introductions for a fee.

Previous post:

Next post: