More hedge funds are answering their clients’ calls for long-only investments. Traditional asset managers, meanwhile, are adding long–short strategies. And investors are still jittery postcrash, even without all the role switching.
Enter, reassuringly, big global banks like Bank of New York Mellon Corp., Citigroup and JPMorgan Chase & Co. with the ultimate multipurpose product: prime brokerage integrated with global custody — prime custody. “Global prime custody offers a new service channel for multiple types of clients,” says Josh Galper, managing principal of Concord, Massachusetts–based consulting firm Finadium. His firm foresees an almost $700 billion market for the converged service.
What prime custody basically does is offer a single interface — a one-stop portal — for the multiple and disparate services involved in prime brokerage and custody. “It makes complete sense, and our bank is in a position to offer it,” says Devon George-Eghdami, head of JPMorgan’s prime custody group. The bank’s acquisition of Bear Stearns Cos. gave it a suitable technology platform.
“Partnering with a prime brokerage can safeguard assets in a separate depository,” argues George-Eghdami. “And the integrated approach streamlines execution and collateral management, with the goal of reducing financing costs and consolidating reporting.”
JPMorgan offers such varied services as “leverage expertise,” prime brokerage financing, securities lending, foreign exchange, derivatives, collateral lending and, of course, custody. And through its Morcom portal, the bank lets customers access fund services, carry out agent lending and manage cash, among other things.
Citi’s prime custody portal, CitiDirect, similarly lets fund managers deal with reporting, transactions and financing in one place. “CitiDirect brings an ease of access to hedge funds to look at their positions,” asserts Chandresh Iyer, who heads Citi’s global custody and investment services. “The client’s client is assured of the right level of protection.” Like JPMorgan, Citi provides a whole host of services: reporting, transactions and financing, safekeeping, settlement, income processing, recordkeeping, foreign exchange, cash and liquidity management, fund accounting and collateral monitoring.
BNY Mellon takes less of a supermarket approach. For a start, the bank does not have its own prime brokerage (though it does have a clearing broker in subsidiary Pershing). “We are the levered operation between the prime broker and the hedge fund,” says Brian Ruane, CEO of BNY Mellon Alternative Investment Services. “Security needs to be delivered from somewhere — hence prime custody.”
Through its prime custody operation, BNY Mellon delivers a combination of global custody, collateral and cash management and other services that, Ruane contends, “blend our resources into one solution for hedge funds.” Because it’s not a prime broker itself, the bank allows hedge funds to access multiple prime brokers via its prime custody portal. The bank currently reports in excess of $140 billion in prime custody assets.
Historically, hedge funds have held some assets with prime brokers. But the collapse of Lehman Brothers Holdings quickly cured them of that habit, when funds found themselves treated as mere creditors in a bankruptcy, notes Patricia Watters, who ran operations for a big fund of hedge funds before starting her own firm, Catalina Consulting Partners in Newport Beach, California, to assess operational risk for hedge fund investors. “It’s easy to see why the addition of a trust-department-type custodian has appeal for hedge funds,” she says.
Still, prime custody has its share of skeptics. Glen Dailey, the head of prime brokerage at investment bank Jefferies & Co., doubts the integrated platform concept is attracting much money. Counters JPMorgan’s George-Eghdami, “We’ve seen incredible interest; we’re out there pitching with customers.” (Ironically, Jefferies provides custody for its clients chiefly through JPMorgan.) Others say applications crucial to hedge funds, such as financing assets and managing collateral across asset classes, differ too much from custodial functions to make prime custody truly feasible. Still, some big banks are determined to prove them wrong.
