- Royal Bank of Canada has quietly started a U.S. prime brokerage operation in New York to tap into the growing market for hedge fund services.
The Toronto company, which calls itself RBC Financial Group, plans to formally unveil the new unit, RBC Hedge Fund Services, as early as this week. It offers settlement, clearing, custody, financing, and reporting services to hedge funds.
Peter Sanchez, the global head of prime brokerage and operations in Royal Banks global treasury services division, is leading the unit. Sanchez, who also oversees the parent companys Canadian prime brokerage operation, is a former Greenwich NatWest Markets executive who joined Royal Bank 15 months ago.
Gordon M. Nixon, Royal Banks chief executive and president, said Wednesday that the new brokerage unit is part of an effort to expand institutional offerings and sales in the United States.
Royal Bank decided to get into prime brokerage because "its a high-margin, fee-based business," Nixon said at a Montreal conference sponsored by National Bank Financial Inc.
Hedge funds are one of the fastest-growing areas of financial services. By some estimates the number of funds could reach 10,000 worldwide within two years. Exact figures are hard to come by, since the funds are largely unregulated.
Elizabeth Rowe, a senior consultant at the New York financial services research firm Find/SVP Inc., said more hedge funds means a growing demand for back-office services. "The hedge fund market is booming and will continue to boom, which means there are increasing opportunities for companies to get into" the business of providing services.
Experts say that even though a handful of large firms still dominate the business of providing settlement, clearing, custody and other back-office services to hedge funds, competition is growing.
Over the past year a number of global banks have started or beefed up prime brokerage operations in an effort to win business away from Goldman Sachs Group Inc., Bear Stearns Cos., Morgan Stanley, and other large firms that control most of the market.
Citigroup Inc., Bank of America Corp., and Merrill Lynch & Co. have mounted challenges to the market leaders by shuffling management or expanding their prime brokerages. Last month Citigroup appointed Alice Hackett as the head of its prime brokerage and said it is seeking ways to build the business.
Rowe said that for most large banks prime brokerage is no longer merely a sideline business, but a "core offering" for institutional customers.
In an interview Wednesday, Sanchez said Royal Banks decision to offer hedge fund services south of the border was driven partly by a desire to provide a more complete line of products. It already offered most of these back-office services to other institutional customers, though it did not target hedge funds in the United States.
"To some degree, the way we were structured, the only missing link from a service perspective was hedge funds," Sanchez said.
Some funds already are Royal Bank customers and at least initially will be a primary source of business for the unit, he said. "Its another service to add for existing clients, leveraging the business that we already have today in structured products, cash equities, swaps, and our stock loan group."
Sanchez, who is based in New York, has hired a half-dozen employees for the unit, most of them salespeople.
But the unit plans to go after new hedge fund prospects as well.
"Our first focus will be our existing internal clients, with U.S.-Canadian strategies," Sanchez said. "Our service offering will be where we can be a secondary broker to large funds, but we will also service new hedge funds. I think to be in this space, you have to do both.
Rowe said Royal Banks cross-border expertise could be "a big selling point."