A Transformational Year: Assessing the changing prime brokerage landscape
The collapse of Archegos and the GameStop short squeeze has radically upended the hedge fund prime brokerage space over the past year, raising fundamental questions over PBs’ lending activities and business models.
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What’s changed? The market volatility has changed. The Deltas of what is risk, and how you control risk, have changed dramatically, and I don’t think anyone has a full handle on it,” Press says. “That’s where prime brokerage has changed. What is leverage? How do they look at loan-to-value when derivatives are part of the structure? How do they determine risk with the current levels of volatility?”
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In the attendant chaos, many prime brokers discovered they could not rely on historical volatility models to assess the risk that clients were assuming, whether long or short, and instead tweaked their models to use 30-day volatility patterns rather six-month windows. The so-called “meme stock” frenzy – which also drew in other retail stocks including AMC, BlackBerry, and Bed Bath & Beyond – saw several PB lenders reportedly tightening up risk controls and collateral requirements for certain short positions.
In a key step-change for their PB businesses, lenders adapted their models accordingly and are now seen as better-placed to address periodic bouts of volatility which risk the potential loss of capital resulting from an Archegos-style blow-up.
the full article is available at https://www.hedgeweek.com/2022/04/04/313442/transformational-year-assessing-changing-prime-brokerage-landscape