Prime brokerage is the generic name for a package of services offered by a firm, such as an investment bank, to institutional clients, such as hedge funds, mutual funds, and other money managers.
Prime brokerage grew from the need to process and control the trades of hedge funds and other firms more efficiently. Today, the services provided by prime brokers include trade execution, settlement and custody, financing, lending securities for a short sale, and capital introductions. Prime broking itself isn't just highly profitable, but also offers a route to sell additional services to hedge funds and other clients.
A cursory glance at the website of the leading investment banks indicates that prime brokerage now represents a key offering of these banks.
But the industry faces some challenges. As has been well documented, the global financial crisis resulted in the failure of a number of significant financial institutions, while others required government intervention to keep them afloat. Prime brokers were at the center of the turmoil, which exposed the risks that hedge funds face when their assets are rehypothecated. As funds tried to reclaim rehypothecated assets, they discovered they were in a “queue” of general creditors.
