Why Use Prime Brokers?

Another prime broker advantage compared to a low commission retail broker: A prime broker will typically pay interest on the proceeds of short positions. For a low turnover strategy, a prime broker could actually be cheaper than a low commission retail broker.
Anyone familiar with a prime broker with low commissions? I'm talking to a prime broker that is quoting 1.5 cents per share for 1 million shares per month volume. Sure would like to get 0.5 cents.
 
Quote from prudent:

I know of a prime broker who will take a 200k account. Their service is horrific, the execution platform is embarrassing and they have never heard of EandO insurance. You get what you pay for.

Prudent
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I'm not sure if I quite understand what you are saying but SEC requires 500k min to open a prime brokerage account. In addition, there are low cost brokers that offer prime brokerage accounts. There seems to be a misunderstanding of what a prime account is. If you find good brokerage with a decent clearing firm, you can ask if they offer prime. You can get the best of both worlds.
 
On Capital Introduction

Let's face reality here. If you have $1MM in your fund and say you prime with Goldman, I don't think you are going to get much capital introduction attention. A salesperson is not motivated to try and turn you into the next $1bn fund - that's an unlikely event and not really worth his time. It's much easier to work with the $100MM funds that need to grow. So, this capital introduction thing is a myth if you are tiny - you are simply not worth anyone's time to promote.

On Perks

Perks aren't just given to you because you are nice. Perks are given to you because you generate commissions. Perks are just a rebate. Softing your Bloomberg, Aeron chairs, Polycom phone sounds cool - but it comes out of your commissions. For a $1MM fund, that additional drag can seriously impact your performance numbers. Ironically, those perks might hurt a small fund much more than a big fund.

So why have a Prime?

If you use a gazillion executing brokers, then you need a prime broker to keep all the accounts squared away and cleared at one central point. This way you can keep track of your accounts from a single source. You can also do your stock loan, your leverage and your settlement all at one provider. This is the main reason to prime.

Since these are not really issues that are critical at the $1mm asset mark, let's just say that looking around for a prime would be premature. Wait till you pick up more assets!

On the other hand, branding does count for a lot ..... but you have to go the whole hog - prime with Goldman or Morgan Stanley, audit with PriceWaterhouse and have counsel at Shearman. With a full house of big names you should be able to raise money a little easier - but be prepared for a huge annual retainer fee.
 
For the benefit of all,

a Broker executes your trades

a Prime Broker, usually, clears your trades

usually you have several Executing Brokers who all give up their trades to be cleared by the Prime. This is just so that you have records at one place.

All that other stuff (free bloombergs, capital introduction, stock loan, loans, met tickets) is just extra concierge service or extra revenue streams for the Prime.
 
I similarly have a small fund. I'm shooting for market neutral and thus have significant short positions. I have found that the availability of inventories with retail brokers to be very limiting. In fact, shorting only with them both decreases returns and increases risk. I have found that many of my best picks are difficult to borrow, even though readily available with Prime Brokers.

I have not yet made the switch, but it looks like a good Prime could enable me to nearly double returns.

But which ones are good, and willing to deal with a sub-10M fund? There also seems to be a high liklihood of corruption with Primes. They make a lot of promises, but I have trouble trusting them.

Further I want good automation. Who puts that all together well?
 
Prudent,
Far and away, the most common reason hedge funds use prime brokers is to "trade away" as Screen name Trade24 alludes to on this thread. Historically, prime brokers were initially established to dispatch the away trade. By acting as a central repository for funds, a hedge fund can open accounts and place orders with any B/D, as the prime broker guarantees the trade with it's full faith and credit. The prime broker acts in a way that is very similar to the capacity that your bank does in the case of your checking account. Although the prime broker also avails you of many other services such as: introductory, research, reporting, hypothecation, etc, these are all subsequent and incidental to the industry's original intent.
Hope this is helpful.
 
Exactly, If you have a decent relationship, when your technology goes down and its on your Prime brokers side, sometimes they will take the hit and offer "Relief of Loss".

Let me point out this is a big difference from the many firms that feed on daytraders and could really care less about the professional relationship. If your technology goes down, or you have a position that you don't know or can't get out of. Read your contract your on your own and you may end up owing them money "Buyer beware" mentality.

This cheaper is better mentality is barrier #2 for most people after having a working trading plan.

Whereas prime brokers of investment banks can be incredibly expensive vs. the deep discount brokers. There is a middle groud. There is a sort of piggy back relationship that exists with large trading desks at various institutions. I have come to know it as the ""Prime broker piggy back" in certain circles. You won't pay the lowest commission, then again your not paying the investment bank level execution commission either. The point is it will give you access to the prime broker services, unlock margin, relief of loss, and softdollar options allowed through this economies of scale driven relationship not normally available to retail or prop arcades.

It was trader vic I believe who said something about investing in yourself and your infrastructure. He then wrote some parable about loosing a lot of money because he had not done so at that time and had since regrouped. That story stuck with me.

I personally now only utilize these types of trading relationships because they afford me a fair shake of both worlds. Without having to be the 50MM pound gorrilla to get noticed. I have one guy I call, and he takes care of me and my trading business very well.

This options not for everyone though, where its not largly capital intensive, if you do form a relationship as such, as was posted earlier they will care about your levels of risk. If your just out to take sub-pennies out of the market or be a cowboy. Deep discount maybe for you. If your looking for prestige go Prime broker. If your looking to trade with an operational edge, I suggest looking for a "Prime broker piggy back" type relationship.

As for what I would do if I were in your shoes, it would strongly depend on the types of service your growing fund would need. You may not get your value added going with the big IBanks at only 1MM.



Quote from Nordic:

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
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Target around 5MM

5 years, both a bear and a bull market year.

Just a best practice, risk adjusted returns of about twice the current interest rate. This can be calculated and defended and argued about till the cows come home, but this rule of thumb is what the accredited public is looking for.


Quote from jerryz:

Can you be a little more specific about the size that prime brokers are willing to take on nowadays? I know it all depends, but how about a few examples?

What is your definition of a good track record in terms of returns vs. risk-adjusted returns and length of the track record?

Thanks.
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I am just hopping in here without read all of the posts. Let me say this. I have started two funds, once with a prime broker and once without.

There are only a few reasons to use a prime broker in my opinion:

1. You plan on trading through several brokers and need a place to consolidate your trades

2. You rely heavily on street research or soft dollar arrangements

3. You need access to difficult-to-short names for shorting

Otherwise, in my opinion, with $1 MM you should stay away from a prime broker for these reasons:

1. Your comissions will be higher than what you could get elsewhere (IB for instance) -- even with $1 MM you'll have to haggle SLK (GS Execution and Clearing), to get to a penny share.

2. Despite what they advertise, no prime broker is going to introduce capital to you at that size, much less without a 3-5 year track record.

3. At $1 MM you're a loss leader account to the prime broker, you shouldn't expect great service.

Also, from my experience you're not going to get free office space or a free bloomberg as some here might suggest -- not to say it won't be different for you.

Just my 2 cents.
 
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