BLOG - The Race to Multi-Prime: Short -Term versus Long-Term Drivers. August 7, 2008

Thanks everybody for your feedback on our whitepaper - A Flat World, Multi-Prime and the One Path to Nirvana - that will be officially published August 11th.

The response to the paper so far has been fantastic. Most people agreed, or at least were willing to consider, that the most important "macro" long-term driver causing funds to establish multiple prime broker relationships is the expanded search for alpha and the requirement for funds to tap multiple prime brokers' expertise in areas such as emerging markets and derivative products.

Perhaps, not surprisingly, the most common objection was that the real multi-prime driver was the issue of counter-party risk. The importance of this driver is certainly acknowledged in the whitepaper but it is classified as a short-term driver. I think that in 12 months time it will be unlikely that counter-party risk will be discussed as much as it is today, whereas the topic of the expanded search for alpha will only grow in importance, particularly as hedge fund returns continue to be under pressure.

Having said that we are definitely seeing our clients and prospects being motivated to consider multi-prime by this short-term driver. These concerns became evident when rumours began to form around Bear Stearns, the number 3 prime broker. Overnight funds realized that their assets and their ability to conduct business were at risk. This was particularly true for firms that were single primed with Bear. Stories about Lehman and the uncertainty surrounding the sale of BofA prime brokerage only served to compound these concerns.

Interestingly a related issue that is getting a lot of air time right now is funds' ability to access leverage. Before the credit crisis hedge funds had ready access to their primes' balance sheet. We are now seeing investment banks re-assess their risk profile. This puts funds, particularly single primed funds at risk. The first step for funds to mitigate this risk is to establish additional prime relationships. Beyond this first step a new emerging trend is funds looking to secure leverage from larger custodians, such as banks that have stronger balance sheets. Finally funds are now looking at getting rated by the rating agencies and issuing public debt like Citadel did back in 2006.

The conclusion may be that it not of primary importance how we classify these drivers, what is important, is the reality that there are now multiple drivers converging on funds that make the era of a single prime fund a thing of the past. Firms must now focus on how to overcome the operational challenges of multiple prime-brokers.

(To download the paper please go to www.nirvanasolutions.com/web/A-Flat-World-Multi-Prime-and-the-One-Path-to-Nirvana)