In this post Lehman era, the question I continue to grapple with is: How many prime brokers do you need?
Given that our fund is one of the more plain vanilla Long/Short equity funds, I think more than two is really unnecessary. We launched our fund in the end of 2008 with three prime brokers and a segregated cash custody account (when I was hired, our initial thought before Lehman was just one prime broker and no cash).
The problem I run into with multiple primes - other than the hassle of additional reporting. reconciliations, etc - is being able to spread my balances to each. I don't end up with significant assets at any one area to use as leverage for cost savings.
I understand being able to spread counterparty exposure over multiple primes is definitely something investors are thrilled with - I get it - but there has to be a happy medium to it.
I pose the question to the website from an investor and hedge fund prospective. What is the right number? 1, 2, 5??
Do we still need to have our free cash in a segregated cash account, and if so what percentage of NAV are investors happy with? You have to remember that performance is affected in these situations - not enough balances, can't negotiate down financing rates. Need to have x% of NAV away from PB - might be borrowing from Peter to pay Paul. In the world of uncertain market performance, the last thing any hedge fund manager needs is additional basis point hits to an already weak 2010 performance number.
With all of this in mind, having multiple primes does have advantages above and beyond minimizing counterparty exposure, such as free competition to get locates on hard to borrow names. Letting the brokers fight it out can actually save some significant performance depending on how long you hold your positions. They also can go in and borrow stock from you and then you can use the other brokers as a benchmark for rates. This enables a manager to more effectively manage the financing game.
What are your thoughts? What stories do you have recently? I would love to get a lengthy blog going on this topic.
Marc Abel, Chief Financial Officer, Dabroes Management LP
Executive Board Member, HFBOA