Hedgeweek: “A healthy evolution”: How market ‘stress tests’ are reshaping the hedge fund-prime broker dynamic

The Archegos meltdown, the “meme stock” short-selling squeeze, and new curbs on Chinese education stocks contributed to a “significant stress test” for the prime brokerage sector in 2021, one which potentially heralds far-reaching consequences for the ways prime brokers and hedge funds do business in the future.

Speaking to Hedgeweek, Jack Seibald, Managing Director and global Co-head of prime brokerage and outsourced trading at Cowen, says the three seismic events have had sizable consequences to the prime brokerage sector, and could prove pivotal in shaping the outlook for 2022.

Looking ahead to 2022, Seibald believes major challenges now confront the prime brokerage business in the aftermath of the recent upheaval.

“We need to be ever more diligent about understanding the collateral that our clients are posting with us, and understand and test the veracity of our risk management systems,” he observes.

Hedge fund managers, meanwhile, are faced with an environment in which the PB balance sheet is going to cost more than it did previously.

“You can’t have a situation where two large primes evacuate the market, and expect all that business to get absorbed at the same low rates that the clients were afforded by the exiting primes. That’s another trend that I suspect will we will hear more of as the months go on.”

“There’s definitely much broader use of consulting services,” he says. “It’s probably indicative of a number of things. One is that the solutions being offered in the marketplace are much broader and far better today than they were before, particularly as it relates to the outsourcing of functions.

“Also, managers are trying to make sure that they’re fully informed of not only what solutions are available and what needs they can solve for them, but also, from a cost perspective, whether they can be beneficial or not.

The full article is available at https://www.hedgeweek.com/2022/01/05/310789/healthy-evolution-how-market-stress-tests-are-reshaping-hedge-fund-prime-broker

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