What is a Prime Broker?

Adam Hill

A prime broker is a broker or brokerage firm that offers special services to certain clients. These clients often include hedge funds, stock specialists, and other money managers. What these clients have in common is the need to be able to borrow securities or funds in the daily course of business. Most large investment banks offer prime brokerage services to these clients.

Financial professionals who choose to purse a career in prime brokerage are essentially taking on a role in the hedge fund industry.
Financial professionals who choose to purse a career in prime brokerage are essentially taking on a role in the hedge fund industry.

The services that a prime broker will usually offer, apart from lending money and securities, include operational support, global custody, and technological tools to allow the client to track portfolio positions. Operational support basically means that the prime broker acts as the agent between the client and all other brokers. The broker is able to do this because of the principal of global custody. This means that the prime broker holds the clients' assets on their behalf, as well as providing a centralized means for the closing of transactions and for the servicing of assets.

Each client of a prime broker will have certain technological needs related to the management of its portfolio. These can be as simple as daily statements or as complicated as real-time portfolio reporting, and the client must work closely with the prime broker to ensure that its needs are met. Certain prime brokers offer more specialized services to certain clients. For example, a prime broker may also be in the business of leasing office space to hedge funds, as well as including on-site services as part of the arrangement. Risk management and consulting services may be among these, especially if the hedge fund has just started operations.

The increased popularity of hedge funds has led to a higher level of competition among prime brokers in recent years, and they have become an important presence in the world of finance. Clients receive numerous practical benefits through the use of a prime broker. Prime brokers usually make money through the financing they provide, as well as through per-item fees when clearing transactions.

The concept of prime brokerage came into being in the second half of the 20th century and is still evolving. When prime brokers first came into being, they were immediately seen to provide huge advantages over the old system, where asset management involved the tedious tracking of every transaction's performance. In this way, prime brokers allowed hedge funds to grow larger and be more profitable than they otherwise could have been. There is some risk involved in prime brokerage, but this risk is carefully managed, and preparations for adverse events in the market are made as a necessary part of doing business.

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