Why Use Prime Brokers?
- Thread starter prudent
- Start date
LTCM = the brokers got what they deserved.
As far as "inside information" do you mean getting some color? i.e "some of my clients have been net buyers/sellers of equities today(not individual names)? Then yes...
anyways..there will always be the 1% out there who break rules in any biz.
How much of your 1 million will be tied up on Margin? I guess that depends on your investment strategy. Prime brokers in many cases offer "relief" for Hedge funds based on their risk and capital. No clearing BD is going to give any margin relief. Of course you could always become a BD and establish a JBO.
Nordic
Nordic,
Our leverage does not exceed 4:1 and is consistently 3:1 and below. Strategies are special situation (event driven) based. Trading parameters are based on how our specific basket has reacted to each mornings absolute SP value within a certain numerical range.
It is a proprietary strategy we've fine tuned over the last 5 yrs.
Prudent
Our leverage does not exceed 4:1 and is consistently 3:1 and below. Strategies are special situation (event driven) based. Trading parameters are based on how our specific basket has reacted to each mornings absolute SP value within a certain numerical range.
It is a proprietary strategy we've fine tuned over the last 5 yrs.
Prudent
Who are some third party marketers one can look to raising money for you?What criteria do they look for?
Quote from power_uptick:
Prudent,
The reason why a hedge fund with $1 million under management would want to use a prime broker is because the prime broker
can get you clients. This is the main reason why hedge funds use prime brokers. A firm such as Bear Stearns or Goldman will sell itself by saying that it can get you hedge fund clients. Since i-banks have a private client division, they will know plenty of wealthy investors. Of course, in exchange for referring clients, they expect you to trade through them even though their commission rates are not cheap. The hedge fund benefits not only from any clients that are the introduced by the broker, but also from the air of legitimacy that an investment bank can give. Clients think that if you clear through Bear Stearns, you are less likely to cheat them. There was a Forbes article a few years back titled "Bear Stearns and Bucket Shops" that mentions this.
Is this best for the client? Of course not, since the client ends up paying higher commissions. But many clients don't understand this.
Is this good for the hedge fund? In many cases, yes. It is not
easy to raise money, even with good performance. One way is to use a 3rd party marketer, who will charge anywhere from 20%-50% of the fees collected. The other way (the cheaper way) is to
trade commissions in exchange for clients. This way, the money is coming out of the pockets of the clients, not the hedge fund owner(s).
Ideally, a hedge fund would get clients based solely on its outstanding performance, while getting the best commission deal possible for its clients. Since the performance is great, money would be pouring in, and there would be no need to charge the clients a higher commission rate in exchange for finding the clients. Ideally, the fact that the hedge fund was looking out for its clients by getting a great commission deal would be sufficient marketing. Of course, we don't live in an ideal world, do we?
When you say 20-50% of the fees collected,do you mean just the management fee or the management fee and the incentive fee,usually 20% of the profits?
Depends on the prime broker... BofA was willing to take anyone on, even for a few hundred K in 1999. Why would they do that? Number one, to take 6 cents per share on every trade and number two, the possibility that your pathetic fund would actually turn into something great.
Another poster pointed out that if you're patient, and you have a good track record, then the money will come. That is absolutely true, and it is a good way to grow your fund organically. Why spend six months going through a masturbatory due diligence process with a fund-of-funds to land a $1 million placement when you can get an accredited investor for the same amount in a week? Not only do the FoFs suck you dry, but they will distract you from your focus: research and making money.
A Goldman analyst just told us to raise as much money as possible with the track record, and if it didn't work out, just start another fund. That is the mentality of many so-called experienced fund managers. Leverage your system to the hilt, and go for the home run. Instead, I recommend that any potential manager go to the Market Wizards books and read the Stu Walton, Gil Blake, and Ed Seykota interviews. That is the right path for long-term, consistent growth.
We met with one FoF manager, and he said that our prime broker was shit, never mind the consistent 20%+ returns. We immediately implemented our "no assholes" policy, which excluded all FoFs.
Good points...and those interviews are very insightful. Our focus is consistent profitability...not returning 500% in the first year. If that happens fine, but our focus is .05% per month, we've gotten this far because of that and plan to continue.
We have found that most educated high-net worth individuals are not as impressed with a 180% year, a 50% yr, an 80% yr, and a -30% yr as they are with 4 solid 60% absolute return yrs, that is our concentration.
Prudent
We have found that most educated high-net worth individuals are not as impressed with a 180% year, a 50% yr, an 80% yr, and a -30% yr as they are with 4 solid 60% absolute return yrs, that is our concentration.
Prudent