2005 prime brokerage survey

2005 Prime Brokerage Survey

reprinted from global custodian | SPRING 2005 1

2 reprinted from global custodian | SPRING 2005


MethodologyGlobal Custodian’s annual Prime Brokerage Survey, now in its second decade of existence, is the undisputed industry benchmark. The results that follow in these pages are our best attempts—refi ned over the past 11 years—at gauging the services prime brokers give their hedge fund clients.

Common wisdom today has it that prime brokerage is an oligopoly, or even a duopoly. This Survey indicates otherwise. At least when it comes to customer satisfaction, the duopoly is no more. This year, 11 prime brokers met our threshold for inclusion in our Best in Class designation. In addition, we included some comment on six additional fi rms.

With every passing year, hedge funds have become more and more important to investors. What was once a niche business centered on a handful of idiosyncratic traders is now the most dynamic element of the investment management community. Global Custodian has reported closely on hedge funds’ journey from boutiques to institutional managers—our cover story in Spring 2001, “Coming Together: How and why the pension world will transform, and be transformed by, hedge funds,” predicted many of the developments we now see in the market. And as hedge funds have grown in importance, so too have the prime brokers that service them. It is our hope that this Survey has accurately monitored and reported on that trend.

In terms of the respondent base for this year’s Survey, there were some noteworthy developments:

• Overall responses from hedge funds increased 20%, from 1,336 in 2004 to more than 1,600 responses this year, including more than 450 responses from non-US hedge funds.

• There was a 65% increase in response from funds of $1 billion or more in assets. • Responses from multistrategy funds were up approximately 90% from 2004. • The average number of prime brokers evaluated by each hedge fund increased

from 1.3 to 1.9.

As for the results that follow, they are based on three primary factors: scores, respondent comments, and number of responses. The collected data was also followed up by Global Custodian survey staff to ensure that all responses were legitimate and to question further all “outlier” responses—in terms of both scores and comments—so that they could be put into their proper context.

Respondents were asked to rate their providers in seven service areas: Client Service, Securities Lending, Financing (including Risk and Leverage), Reporting, Technology, Operations, and Capital Introduction. In order to provide a more accurate picture of a prime broker’s capabilities—and thus a more useful tool to hedge funds—we have segmented client scores as well as commentary by asset size and by non-US respondents (non-US respondents are characterized as hedge fund fi rms based outside the US).

The Best in Class honor roll was slightly altered this year. Instead of listing Best in Class honors in each individual investment strategy, we have provided Best in Class awards for single strategy and multistrategy funds, which are based on larger respondent sample sizes. As in past years, Best in Class awards were also bestowed based on respondents’ asset size and for international prime brokerage.

Every year, our Prime Brokerage Survey has undergone an evolution of its own. This

Common wisdom today has it that prime brokerage is an oligopoly, or even a duopoly. This Survey indicates otherwise. At least when it comes to customer satisfaction, the duopoly is no more.

ILLUSTRATION BY WOOK KIM



year, we owe much to the intellectual capital of Greenwich Associates, which has worked closely with us to further develop the questionnaire on which this Survey is based, and whose analytical capabilities have allowed us to accurately mine the lode of data that we gather each year. The data that is printed on the pages that follow represent only a small portion of information we have collected—both in terms of the individual prime brokers and the overall hedge fund market. Full research reports are available on the Survey results. Please contact Mike Stratton ([email protected]) for details.

In preparing this year’s results, we have rigorously followed the respondent data. That said, some of the information contained herein has a certain degree of subjectivity—the survey represents

the best efforts of Global Custodian to interpret the volumes of sometimes confl icting data we have collected from hedge funds, prime brokers, and other industry experts.

A wide swath of hedge fund managers spent valuable time responding to this year’s questionnaire—without their efforts, this Survey would not be as substantial as it has become. Our thanks go to them, as well as to the prime brokers themselves, who have, almost without exception, welcomed our Surveys group into their world. As always, however, all blame for error, omission, and oversimplifi cation is ours.

N Quinn Keeler Michael StrattonDirector Senior vice presidentResearch & Surveys Research

Asset Size

<$100 Million $100MM–$1 Billion >$1 Billion

Securities

Financing

Client Service

Reporting

Technology

Operations

Capital

Bear Stearns

CSFB

Lehman Brothers

Citigroup

Lehman Brothers

Merrill Lynch

Citigroup

CSFB

Merrill Lynch

Banc of America

Citigroup

UBS

Banc of America

CSFB

Lehman Brothers

Banc of America

CSFB

Merrill Lynch

Citigroup

Goldman Sachs

Lehman Brothers

Lehman Brothers

Morgan Stanley

UBS

Citigroup

CSFB

Morgan Stanley

Banc of America

Lehman Brothers

Morgan Stanley

Lehman Brothers

Morgan Stanley

UBS

Banc of America

Lehman Brothers

Morgan Stanley

Banc of America

Lehman Brothers

Morgan Stanley

CSFB

Lehman Brothers

UBS

Citigroup

Merrill Lynch

UBS

Citigroup

CSFB

Deutsche Bank

Banc of America

CSFB

Morgan Stanley

Banc of America

CSFB

Morgan Stanley

Banc of America

Lehman Brothers

Morgan Stanley

Banc of America

Citigroup

Morgan Stanley

Citigroup

Deutsche Bank

Lehman Brothers

CSFB

Lehman Brothers

Morgan Stanley

Barclays Capital

CSFB

Lehman Brothers

Banc of America

CSFB

Lehman Brothers

Banc of America

Morgan Stanley

UBS

Banc of America

Lehman Brothers

Morgan Stanley

Banc of America

Lehman Brothers

Morgan Stanley

CSFB

Lehman Brothers

Morgan Stanley

Citigroup

Lehman Brothers

Merrill Lynch

Citigroup

CSFB

Merrill Lynch

Citigroup

CSFB

Lehman Brothers

Banc of America

Morgan Stanley

UBS

Banc of America

Lehman Brothers

Morgan Stanley

Citigroup

CSFB

Lehman Brothers

Citigroup

Deutsche Bank

Lehman Brothers

Barclays Capital

Bear Stearns

Lehman Brothers

Barclays Capital

Citigroup

CSFB

Barclays Capital

CSFB

Lehman Brothers

Barclays Capital

Citigroup

Lehman Brothers

Citigroup

Lehman Brothers

Morgan Stanley

Barclays Capital

CSFB

Lehman Brothers

CSFB

Deutsche Bank

Lehman Brothers

Non-USMultistrategySingle Strategy

Best in Class

Lending

Introduction

4 reprinted from global custodian | SPRING 2005


Respondents by Asset Size

ASSET SIZE

<$10MM 7%

$10MM–$49MM 14%

$50MM–$99MM 11%

$100MM–$249MM 14%

$250MM–$499MM 11%

$500MM–$999MM 10%

$1B–$1.9B 11%

$2B–$2.9B 10%

>$3B 9%

None given 12%

Forms of Alternative Financing Used by Respondents

STYLE/STRATEGY

Margin Loans 78%

Exchange-Traded Options 46%

Foreign Exchange 46%

Futures 39%

OTC Options 39%

CFDs 29%

Cross Product Margining 26%

Total Return Swaps 26%

Credit Default Swaps 22%

Repos 20%

Asset Swaps 17%

Term Financing 15%

Portfolio Swaps 10%

Hybrid Swaps 7%

Respondent Investment Style/Strategy

STYLE/STRATEGY

Equity Long/Short 68%

Event-Driven 25%

Fixed Income 22%

Market-Neutral 21%

Convertible Arbitrage 20%

Distressed Securities 16%

Capital Structure Arbitrage 13%

Macro 13%

Quantitative 13%

Emerging Markets 10%

Sectoral 9%

Dedicated Short-Seller 3%

Respondent Profi leWhere Respondents Are Located

■ USA East 49.8%

■ USA West 22.4%

■ UK 15.7%

■ Europe 6.7%

■ Pacifi c Rim 2.5%

■ Canada 1.5%

■ Australia 0.9%

■ Latin America 0.3%

■ Caribbean 0.1%

Percentage of Assets by Investor Type

■ High-Net-Worth Individuals/Family Offi ces 38%

■ Fund of Funds 25%

■ Banks and Insurance Companies 10%

■ Other 9%

■ General Partners and Fund Employees 8%

■ Endowments and Foundations 5%

■ Corporate Pension Funds 3%

■ Public Pension Funds 2%

Average Number of Prime Brokers Evaluated

<$100MM 1.2

$100–$999MM 1.8

>$1B 3.0

Overall 1.9

Gross Leverage Ratio (Sum of long and short positions divided by capital)

<$100MM 2.1

$100-999MM 2.2

>$1B 2.6

Overall 2.3

Importance Placed on Survey Categories by Respondents

SURVEY CATEGORIES

Client Service 1% 12% 87%

Operations 1% 19% 80%

Reporting 1% 21% 77%

Technology 3% 30% 67%

Securities Lending 10% 25% 65%

Financing 12% 34% 54%

Capital Introduction 39% 29% 32%

NOT IM

PORTANT

SOMEW

HAT IM

PORTANT

VERY IM

PORTANT



SCORESHEET

Respondents to survey (2004), 2005: (63) 132

Single strategy clients: 43% Multistrategy clients: 57%

Respondents using this fi rm as their primary prime broker 55%

Respondents using this prime broker for:

Equity prime brokerage only

Fixed income prime brokerage only

Both equities and fi xed income

Respondents using this prime broker for*:

Domestic prime brokerage only

International prime brokerage only

Both domestic and international

Respondents by asset size

■ <$10MM

■ $10MM–$49MM

■ $50MM–$99MM

■ $100MM–$249MM

■ $250MM–$499MM

■ $500MM–$999MM

■ $1B–$1.9B

■ $2B–$2.9B

■ >$3B

Leading investment styles/strategies pursued by prime broker’s respondents

Equity long/short 61%

Fixed income 38%

Convertible arbitrage 35%

Event-driven 32%

Distressed securities 29%

Market-neutral 25%

Capital structure arbitrage 22%

Leading forms of alternative fi nancing used by prime broker’s respondents

Margin loans 76%

Foreign exchange 45%

Futures 40%

Exchange-traded options 40%

Total return swaps 39%

Credit default swaps 37%

OTC options 34%

2005 proved a breakout year for CSFB, which historically has fallen short of the very top tier of the prime brokerage business. This was clearly not the case this year—the fi rm doubled its response rate, and in the process wins 20 Best in Class awards across all asset categories, as well as in single and multistrategy funds. In 2004, CSFB won just three Best in Class awards, so this is exponential improvement.

<$100MM clients: CSFB garners four out of a possible seven Best in Class awards from small hedge fund clients. Strengths cited by respondents include exceptional client service personnel: “At all levels, [the CSFB team] makes you feel like you are the highest priority and their only client. As a small fi rm we especially appreciate the hands-on attention from the backroom to the boardroom,” says one respondent. “High level of effective personal service, competent staff, desire and ability to service small-sized fi rm,” notes a second. Reporting is where the fi rm could improve, however, as a number of respondents ask for reports by sector as well as ad hoc reporting.

$100MM–$1B clients: Financing and capital introduction win praise and Best in Class awards for CSFB: “Cap intro has clout,” observes one respondent. CSFB’s service staffers are also singled out by many in this group: “Excellent client services personnel, large wealth of knowledge,” is a representative comment. Stock loan could be enhanced, several respondents note, and there are also several calls for systems integration between front and back offi ces.

>$1B clients: CSFB breaks into the most diffi cult asset category, winning three Best in Class awards, up from one in 2004. Again, client service is seen as a major strength. “Excellent access to senior management. Ability to handle special requests at a moment’s notice,” says one respondent. Another praises CSFB’s ability to access fi rmwide strengths: “They have ability to see the overall relationship across various product areas.” Capital introduction is an area where a few clients request attention: “Cap intro team’s knowledge of our goals and strategy could be better, and would be helpful when communicating with investors,” says one client. This seems to be nit-picking—capital introduction, the scores indicate, is a persistent strength.

Non-US clients: On the international front, CSFB earns four Best in Class awards, for client service, operations, fi nancing, and capital introduction. Client service is a strength that extends across the globe. “[CSFB’s strength is] fl exibility and responsiveness. Smaller global team more eager to help than the majors,” says one respondent. There is some confl icting respondent comment on securities lending, and even derivatives—a traditional strength—caught some criticism.

CSFB

BEST IN CLASSFUND SIZE CATEGORY

<$100MM Securities lending, Client service, Technology, Operations

$100MM–$1B Financing, Capital introduction

>$1B Financing, Client service, Reporting

SINGLE STRATEGY Securities lending, Financing, Client service,

Capital introduction

MULTISTRATEGY Financing, Client service, Operations

NON-US Financing, Client service, Operations, Capital introduction

* Note: In Europe, domestic refers to domestic or euro zone, and international refers to non-domestic, non-euro zone

5%

9%

10%

11%

7%

11%

12%

9%

26%

40%

2%

57%

41%

18%

41%

2005 prime brokerage survey

Documents