Thursday, August 9, 2012

3 financing solutions PB offers hedge funds

To a hedge fund (HF), arguably the most valued service by a prime broker (PB) is financing. 2nd is probably execution. Brokers by definition provide access to liquidity, but at what speed? Both #1 and #2 give rise to white hot competitions among brokers, who often invest heavily to offer the most competitive "service" to attract the big hedge funds.

Besides the top 2, Book keeping, back office, accounting etc are essential services too.

I see 3 common financing schemes --

1) margin lending -- hedge funds buying on margin is the most common form.
2) stock lending -- hard-to-borrow will entail a heftier fee.
3) repo

In all 3 cases, PB earns a fee/interest proportional to the loan duration.

For (3), the PB can provide either repo or reverse-repo service to a hedge fund. Either collateral-out-cash-in or collateral-in-cash-out. I feel the cash-out version (PB-cash->HF) is what hedge funds need most. Overnight to 3 months, rarely longer.

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