Finadium Research Report

Traditional Asset Managers as Prime Brokerage Clients:
A Finadium Survey

July 2009

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Portfolio strategies using margin and short selling are the next steps in the evolution of the traditional asset management industry. While not every avenue leads to immediate success, managers have learned from hedge funds that investors seek a wide variety of risk and reward characteristics in their investment styles. This perspective gives them room to experiment and find success in unexplored areas, including mutual funds, separate accounts and their own hedge fund platforms.

In this report, Finadium presents data and details on the rationale for traditional asset managers in leveraged investing and their behavior as prime brokerage clients. Topics include how managers view long/short strategies as part of their business model, how they select prime brokers and how they contend with their frequent use of OTC derivatives. Based on 27 interviews with portfolio, operations and securities lending professionals at traditional asset management firms, the report reflects an important cross-section of asset manager opinions about this growing space.

The march of traditional asset managers towards leveraged investing will remain strong, at least in terms of new entrants and funding committed to marketing and team building. This does not mean that the road is smooth; on the contrary, managers are still learning many of the tricks that hedge funds have known for years. Properly managing the challenges related to shorting securities and optimizing balance sheets through portfolio margining, exchange-traded derivatives and swaps will be critical to the long term success of traditional managers in these strategies.

This report should be read by custodians, prime brokers, hedge fund administrators and technology companies as a revealing look at the needs of their clients and prospects. Traditional asset managers and institutional investors can read the report as a benchmarking tool or as a best practices guide to launching a new leveraged strategy.

This report is 25 pages with 21 exhibits.

■ Executive Summary

■ Asset Managers Look for Alternatives
– Methodology

■ The Philosophy of Leveraged Investing at Traditional
Asset Managers
– Current Perspectives on 130/30
– The Importance of Long/Short Strategies

■ Criteria for Selecting a Prime Broker
– Cost and Availability of Financing
– Market Color, Trading Ideas and Research
– Position Management and Trading in Equities
– What Matters Most in Prime Brokerage Selection

■ Custody, Reporting and Record Keeping for Leveraged Assets
– Transaction Cost Analysis for Stock Loan

■ Trading and Operations for OTC Derivatives

■ The Progression from Traditional Assets to Multi-strategy Portfolios

■ About the Author

■ About Finadium


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