Rethinking Prime Brokerage for smaller hedge funds: why funds should strategically expand their network of service providers to increase their “Alpha and Assets.”

By Brian Stutman


For hedge funds with $750M+ the situation has not changed much in the brokerage world.  They establish a prime brokerage relationship at a bulge bracket firm and receive a full range of core custodial, clearing, portfolio accounting, electronic trading and stock loan capability. In addition, they receive the “Alpha and Assets” value added services that help them be successful – including Capital Markets Calendar or Capital Introduction services.

The vast majority of hedge funds, however, have less than $500M in AUM. The brokerage world continues to evolve for this large market segment.  Recently the environment has become more complicated as new regulations and bank deleveraging have caused the traditional providers of prime brokerage solutions to small funds to shed smaller clients.  Smaller hedge funds have been forced to identify a new prime brokerage and execution mix.  Generally speaking, hedge funds that generate less than $250,000 annually in brokerage related revenue generally can’t prime at bulge bracket primes.  The solution is for these smaller firms to create a network of innovative service providers to gain access to the “Alpha and Assets” services that are necessary to ensure success.

We’ve identified a few ways clients are accessing the  “Alpha & Assets” services that can help hedge funds increase probability of success.

The sell side has become increasingly competitive. Hundreds of “execution-only” brokerages have merged or gone out of business as margins compress, volumes fall and electronic trading and HFT grow. However, the firms that remain are hungry, nimble and entirely focused on their customers and provide a meaningful way to fill the “Assets and Alpha” void.

Step 1: Pick a Prime that is Excellent at the Core Prime Brokerage Role

Set up your primary account with a broker dealer that does have Prime brokerage capabilities (which at its core provides the opportunity to trade away), has a strong balance sheet, and provides appropriate accounting and P/L reporting and  risk and trading systems.  These providers may be light on the “Alpha and Assets” services as their client base continues to grow but strong on core prime brokerage functions that are critical to business stability and asset growth.

The correspondent clearing firms that introduce business to the major primes are excellent places to start. They include firms that introduce to Goldman Sachs Execution and Clearing, Pershing, and Merrill Lynch Professional Clearing Corp. There are many options that have excellent clearing relationships and can handle the prime brokerage requirements of hedge funds with less than $500 mln.

Step 2: Build a True Team of Executing Brokers

Upon a solid foundation of custodial/clearing and administrative services offered by the prime broker, a few of our clients surround themselves with a team of innovative brokerage providers that can augment “Alpha & Assets” services that are specifically relevant and additive to the client’s strategy and client base.

These executing brokers often assist with:

  • IPO and Secondary Calendar activity
  • Sell Side Research
  • Corporate Access
  • Capital Introduction
  • Hedge Fund Consulting

Our clients receive more attention and care as they are a more meaningful customer to their executing broker partners than they could ever be to a bulge bracket prime broker that generates billions in profit.

Unless you are one of the top 10{8e1f0615981319b3f396059236884127ae7e7aef6d96f4009727a5ac6360f204} of hedge funds for a major prime it is unlikely you would receive meaningful capital introduction and hedge fund strategic advice from a large bank.

Yet if you are a real client to one of the many high quality executing brokers – as a group you can replace and improve the overall service model.

Castle Hill Capital Partners assists many funds with bridging the “Alpha & Assets” void.  We do this by analyzing best execution and trading practices of our clients and matching them up with the proper executing brokers that provide not only excellent execution but value added services such as research, capital introduction, access to conferences, calendar, and most importantly be there to answer specific questions on the growth of our hedge fund clients’ business.


Brian Stutman, is a co-founder and President at Castle Hill Capital Partners, Inc., a broker-dealer and strategic marketing advisor based in New York.