Hedge Funds and Prime Brokers

<body stylesrc="../_private/template_title.htm" topmargin="10" leftmargin="10" bgcolor="#FFFFFF" link="#333366" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table3"> <tr> <td width="780" align="center"> <div align="center"> <table border="0" cellpadding="5" cellspacing="0" height="206" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table4"> <tr> <td align="right" height="198" width="1%"> <p align="left"> <img border="0" src="../images/book_berman_mark_(2006).gif" width="133" height="200"></td> <td valign="top" align="left" height="198"> <table border="0" cellspacing="1" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0" id="table5"> <tr> <td colspan="3" width="0%"> <p class="book_title">Hedge Funds and Prime Brokers</td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"><img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> <td width="52%" class="book_details_tags" valign="top" height="144" align="left" rowspan="9"> <map name="FPMap2"> <area href="../main/ratings.htm" shape="rect" coords="73, 0, 164, 33"> </map> <img border="0" src="../images_title/berman5.gif" usemap="#FPMap2" width="211" height="158"></td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" height="32" align="center" width="50%" rowspan="2"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> </table> </td> </tr> </table> </div> <table border="0" cellpadding="10" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="468" id="table6"> <tr> <td> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> <table border="0" cellpadding="5" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table7"> <tr> <td width="50%" valign="top"> <p align="left" class="body"><strong style="font-weight: 400">A prime broker is a broker who consolidates the clearing and settlement of trades for (usually) institutional clients. Those clients may execute trades through other brokers, but the trades are immediately passed off to the prime broker. The prime brokerage industry pretty much exist to serve hedge funds.</strong></p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="125" align="left" id="table8"> <tr> <td width="120"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td><td width="5"> </td> </tr> </table> <p align="left" class="body"><strong style="font-weight: 400">This edited collection focuses on the legal underpinnings and function of prime brokers. The first chapter offers a nice summary of the hedge fund landscape and the prime brokerage industry.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">Next there are two excellent, but largely redundant chapters looking at prime brokerage from a US perspective. Things got started in 1994, when the SEC granted a no action letter, opening the door for prime brokerage. The letter largely laid out the framework under which prime brokers operate, and the chapters describe that framework. </strong></p> <p align="left" class="body"><strong style="font-weight: 400">The main difference between US and European hedge funds is the fact that US hedge funds are usually set up as limited partnerships in the US while European hedge funds are generally set up as corporations in off-shore tax havens like the Canary Islands. Chapter Four describes the European regulatory model.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">Chapters five and six breaks from the largely regulatory focus of the earlier chapter and delve into the contractual relationship between a hedge fund and its prime broker—what documents do they sign, and what do those documents cover? What does a hedge fund look for in a prime broker, and do different prime brokers excel at different things? What about prime brokerage fees? Should a hedge fund have multiple prime brokers?</strong></p> </td> <td width="50%" valign="top" class="body" rowspan="2"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table9"> <tr> <td width="100%" bgcolor="#333366"> <p class="header_yellow" align="center">Contents</td> </tr> <tr> <td width="100%" class="explanatory_text"> <table border="1" cellpadding="0" cellspacing="5" style="border-collapse: collapse" bordercolor="#CCCCFF" bgcolor="#CCCCFF" width="100%" id="table10"> <tr> <td class="contents_expanded"> <p class="contents_compressed">1. Hedge Funds: What are They, How are Unregulated Hedge Funds Regulated and How do They View the Hedge Fund–Prime Broker Relationship? <p class="contents_compressed">2. Hedge Funds and Prime Brokers: The Legal Relationship from the US perspective <p class="contents_compressed">3. The Hedge Fund–Prime Broker Relationship from the Industry Perspective <p class="contents_compressed">4. “Related Parties” and their Role in the Relationship <p class="contents_compressed">5. The Legal Underpinnings of the Relationship: The “Level Playing Field” <p class="contents_compressed">6. The Trading and Economic Factors Driving the Relationship <p class="contents_compressed">7. Corporate Governance by and for Hedge Funds <p class="contents_compressed">8. Key Tax and Accounting Issues</td> </tr> </table> </td> </tr> </table> <p align="left" class="body"><strong style="font-weight: 400">The two closing chapters are very informative but don't really discuss prime brokerage. The first addresses corporate governance from two perspectives: 1) the impact hedge funds have on the corporate governance of firms they invest in, and 2) corporate governance of the hedge funds themselves. The second addresses tax and accounting issues from a primarily US and UK standpoint.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">This is a really wonderful book for sophisticated professionals working for hedge funds, brokerages, accounting firms, lawfirms or regulatory authorities. It will also be invaluable for researchers. </strong></p> <p align="left" class="body"><strong style="font-weight: 400">The only real shortcoming of the book is its silence on the issue of the conflicts of interest the prime brokerage relationship poses. Brokerage is supposed to be an arms-length relationship, so what are the implications of prime brokers providing marketing services (sorry, "capital introduction" services) for hedge funds? What about prime brokers maintaining office space in which to house the hedge funds they serve? Can there really be an arms length relationship when a prime broker is so involved in the launch of a hedge fund that it is essentially launching the hedge fund itself? Prime brokerage is an enormously profitable business, so questions like this are pressing.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">Other than that one oversight, this is an excellent book for sophisticated readers. It provides dry but critically important information. What is more, it is a quick read. You can assimilate the information in an afternoon. </strong><b>[December 9, 2006]</b></p> <p align="center" class="body"> </p> </td> </tr> <tr> <td width="50%" valign="bottom"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table11"> <tr> <td width="100%"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> </td> </tr> </table> </td> <td>  </td> </tr> </table> </div> <table border="0" cellpadding="10" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table12"> <tr> <td width="50%" bgcolor="#FFFFCC" align="center"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" bgcolor="#FFFFCC" id="table13"> <tr> <td> <p class="body" style="margin-bottom: 6; margin-left:10"><b><font color="#333366" size="3">For related books, see sections:</font></b></p> <p class="alternatives_text" style="margin-top:5; margin-bottom:5; margin-left:10"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/portfolio_management_hedge_funds.htm">Portfolio Management - Hedge Funds</a></p> <p class="bullet_line_space" style="margin-left: 10"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/other_functions_regulation.htm">Other Functions - Regulation</a></p> <p class="bullet_line_space" style="margin-left: 10"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/other_functions_trading.htm">Other Functions - Trading</a></p> <p class="bullet_line_space" style="margin-left:10"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/other_functions_corporate_governance.htm">Other Functions - Corporate Governance</a></p> </td> </tr> </table> </td> </tr> </table>  <table border="0" style="border-collapse: collapse" width="100%" cellpadding="0" id="table1" bgcolor="#FFFFFF"> <tr> <td colspan="2" height="12"> <p style="margin-top: 0"> </td> </tr> <tr> <td align="right"> <p align="left" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Ads by Contingency Analysis.</font></a></td> <td align="left"> <p align="right" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Advertise on this site.</font></a></td> </tr> <tr> <td align="center" colspan="2">  <iframe src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=iframe" allowtransparency="true" background-color="transparent" style="margin: 0px; padding: 0px; border-width: 0px" width="300" height="250" frameborder="0" marginwidth="0" marginheight="0" scrolling="no"> <![if lt IE 4]> <script src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=js" type="text/javascript"> </script> <noscript> <a href="http://servedbyadbutler.com/go2/;ID=147917;size=300x250;setID=93136"> <img src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=img" border="0" height="250" width="300" alt=""></a> </noscript><![endif]> </iframe>   </td> </tr> </table> <p align="center" style="margin-top: 20"> <map name="FPMap0_I1"> <area href="http://www.riskbook.com" shape="rect" coords="0, 0, 184, 29" target="_top"></map> <img border="0" src="../images/open_book_riskbook.gif" usemap="#FPMap0_I1" width="185" height="30"></p> <p class="a" align="center"><font face="Arial" size="2"><a href="../main/disclaimer.htm">disclaimer</a></font></p> <p class="a" align="center"><span class="verdana10">website:</span> <a target="_top" href="http://www.contingencyanalysis.com"> <font size="2" face="Arial">http://www.contingencyanalysis.com</font></a><br> <span class="verdana10">books direct link:</span> <a target="_top" href="http://www.riskbook.com"><font size="2" face="Arial">http://www.riskbook.com</font></a><br> copyright <font face="Times New Roman">©</font> Contingency Analysis, 1996 - current</p> <p class="a" align="center"><map name="FPMap1_I1"> <area target="_top" href="http://www.contingencyanalysis.com" shape="rect" coords="0, 0, 240, 88"> </map><img border="0" src="../images/logo_book_white.gif" usemap="#FPMap1_I1" width="241" height="89"></p>  </body>