While large custody and clearing banks have traditionally focused on mutual funds and pension plans, they are beginning to eye the higher-margin prime brokerage business of hedge funds, Bloomberg reports.
Because of the risks involved, and the low credit ratings typically assigned to hedge funds, custodians have shunned this business. But with hedge fund assets doubling in the past six years to $1.3 trillion and projected to reach $2 trillion in another three, custodians are taking notice.
But Wall Street securities giants have practically locked up the hedge fund prime brokerage business, which can be particularly lucrative given the funds' penchant for borrowing money and securities. In fact, securities lending earns Wall Street giants $10 billion a year--three to five times the fees funds pay for basic administrative services-- with Goldman Sachs reaping $1.5 billion in revenue from the business over the past year, and Morgan Stanley taking in $2 billion over the past 12 months from prime brokerage services to hedge funds alone. Custodians' share of such profits pales in comparison; Northern Trust earned just $149 million in securities lending fees in the past year.
Since the hedge fund industry is so secretive and clubby, breaking into servicing it is not easy. But some custodians are trying to do just that by acquiring other firms. Recently, for example, Northern Trust acquired the financial services division of Barings Asset Management, and three years ago, Bank of New York acquired Fund Administration.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.