The Role of the Prime Broker

Hedge fund managers often trade with a number of brokers.  The fund’s prime broker (if they have designated one) provides a consolidation service—this means the executing brokers are instructed to settle all trades with the prime broker.  Since this results in all the trade information being in one place, reporting becomes much easier.

The prime broker’s role has evolved with the growth of the hedge fund industry, and it provides a number of other useful services, including custody of the securities, loaning of securities for short sales, providing margin financing, and providing back office technology and reporting.

A prime brokerage provides a services from security firms and investment banks to hedge fund managers, enabling them to borrow cash and securities for investment. A prime broker provides a centralized clearing facility where executing brokers settle their trades. “The prime” makes money by charging fees (aka “spreads”) for financing security positions and can also charge for additional service as well.

As competition among prime brokers heats up, the role of technology is growing as well as introducing funds to investors.  This is known as a capital introduction.  The prime broker can actually help a hedge fund manager to gather assets by making introductions to potential investors.

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