Prime brokers in the US and Europe are failing to maximise the huge commercial opportunities in the hedge funds industry - worth $500bn in the US and $75bn in Europe in 2001 - due to poor levels of operational efficiency, according to a new report by London based TCA Consulting.
The report, based on a survey conducted by TCA Consulting at an Economist conference on hedge funds, found that while accuracy and timeliness of reporting is key to prime brokerage services, less than one in five of hedge fund managers are completely satisfied with the accuracy of their reports.
Sandra Williams, principal consultant at TCA Consulting and author of the report, comments: "Wholesale banks have become more and more specialised in their business with the separation of equities, derivatives, securities etc. causing a silo effect whereby each department has its own IT infrastructure. These expertise silos can serve the bank well, but hedge funds use products across the bank - so prime brokers need cross-silo information for risk management and competitive financing provision as well as for reporting to their hedge fund clients."
A lack of integration means that prime brokers spend a great deal of their time collating and processing data - time that could be more profitably spent selling their services. Says Williams: "One of the hedge fund respondents surveyed actually complained of a lack of sales calls from his prime broker."
While nearly half of hedge fund respondents cite operational efficiency as key in their selection of prime brokerage services, little over 30% have implemented straight-through processing with their brokers for confirmations, trading and execution. This figure rises to just over 65 per cent in settlements.
Williams says prime brokers should not underestimate the importance of STP. "This is a lose/lose situation - in an expanding market, prime brokers are sacrificing competitive advantages. They need to take time to select and implement STP for everyone's benefit."
Prime brokers are also missing opportunities for providing value adding services, such as corporate event information, believes TCA. Fewer than half of the hedge funds questioned are completely satisfied with information received on corporate events in their investment universe, while others complain about lack of information on settlement dates. Several say they cannot rely on their prime broker to provide corporate action information and source it separately.
Williams says this should serve as a warning to prime brokers: "With the advent of reliable, cleansed data, and messaging standards such as ISO15022, it is now time for prime brokers to positively reassess their corporate actions operations and provide a more efficient and informative service."