A major driver for growth in FX prime brokerage has been the hedge fund community, many of whom are developing FX as a strategy Frances Maguire looks at what hedge funds want from their prime brokers

With FX increasingly being traded as an asset class by hedge funds, banks are queuing up to offer FX prime brokerage and even slashing fees to lure hedge fund clients. Commitment to the prime brokerage market has always been measured by technology investment. But in five short years, it seems that hedge funds are taking connectivity, market access and the efficiency of automation for granted and demanding more effective and sophisticated reporting, for their clients, and increased account control and administration by the prime broker to enable them to focus less on processing and more on investment. But most importantly, hedge funds are looking for smooth operations and a prime broker that can get the basics right.

At the same time, banks are trying to differentiate themselves in an increasingly competitive marketplace. They are doing this by extending their services to smaller funds and moving deeper into the back office of the hedge fund to handle all the administration, including settlement on all customer deals, including with other counterparties. Larger funds benefit from savings on collateral by having all their transactions netted to one portfolio at the broker. Prime brokers are also offering greater end-to-end straight-through processing, faster booking of trades, lower costs and reduced operational risk because of fewer errors associated with re-keying of data. It is these basic operational functions that hedge funds want to see perfected to 100% error-free before prime brokers start adding any additional functionality.

Cross-asset trading

Cross-asset trading is become increasingly important for some funds. Martin Smetsers, managing director of CAL Investments Ltd, who is in no doubt that the algorithmic trading and greater automation provided by the prime broker contribute to the returns of the hedge fund, rather than simply reducing costs, is in favour of more cross-asset functions. In terms of the functionality offered by prime brokers, he would like to see the option to utilise greater automation.