How Prime Brokers Price Their Hedge Fund Clients

Finadium
September 2023
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The models that prime brokers use to price their hedge fund clients have become increasingly standardized in recent years, the result of Basel III regulations and internal directives for Return on Assets (ROA). Profitability has always mattered, but the dual focus on both profitability and balance sheet management may not always be clear on the client side. As a result, hedge funds and other leveraged clients should have a solid understanding of prime brokerage pricing models in order to be a good client. Both funds and their prime brokers will benefit from this education.

This report offers a primer on how prime brokers price their clients and a sample Excel spreadsheet that leveraged funds can use to model their own exposure. The model may be useful for funds with treasury technology platforms and funds that have not yet invested in automation in this area. The model presents options for a US cash prime broker client and a European synthetic financing client. While every leveraged fund has different portfolio and financing needs, the Excel model serves as a starting point and can be adapted and expanded on for customization.

Expected readers of this report include hedge funds and other leveraged fund managers in leadership positions and in the treasury or portfolio finance function. Funds with less experience in portfolio finance may benefit from the introductory sections, while more experienced professionals may turn directly to the discussion of the Excel model and the model itself, available on the Finadium website alongside this report document.

Table of Contents

• Executive Summary
• The Prime Broker View of Pricing Management
• RFPs and Further Evaluations
  • – Getting into the Detail
  • – Ongoing Reviews
• Modeling Financial Optimization
• A Mix of Technology and People
• About Finadium LLC