There used to be little to argue about in the prime brokerage market. So much so that hedge fund managers tended to grade their brokers based on the quality of biscuit they served in their meeting rooms.
The point was that it did not really matter who had the best biscuit: Goldman Sachs and Morgan Stanley were the dominant players in prime brokerage and were the firms the average hedge fund manager sought access to.
In 2007, the two shared more than half of all business in the prime brokerage market. Convulsed by the collapse of Lehman Brothers, however, prime brokerage has once again become an open playing field.
According to a survey conducted by the Tabb Group at the end of the year, close to 40% of the hedge fund industry considered changing their principal prime broker in 2009, with a high proportion doing so.
At the beginning of the year, Goldman Sachs and Morgan Stanley were invariably named as the two with the most to lose in the coming months. Indeed, in the darkest days of September and October 2008, both companies had come close to shuttering their prime brokerage operations altogether, fighting as they were for their survival. And in Global Custodian’s annual prime brokerage survey, released during the summer, Goldman saw its ranking slip one place down to seventh, with a score of 5.52, while Morgan Stanley languished in eighth place.
Both firms have lost their luster as a result of their intractable and often brusque handling of clients in the first few months of the year. The damage was done to Morgan Stanley’s reputation by the company’s chief executive, John Mack, making an inopportune attack on short-selling in September 2008. Such gripes have not been enough to pull clients decisively away, however.
While a prime brokerage account with Goldman or Morgan no longer carries quite the same cachet, many hedge funds say both firms’ experience and technological edge remain unparalleled. In addition, the second-tier prime brokerage houses such as Credit Suisse, Deutsche, Citi and JPMorgan, which have topped the Global Custodian league for two years running, have gained mainly from the demise of Lehman and Bear Stearns, rather than the decline of Goldman and Morgan.
What marked 2009 out was the relative ease with which movements of clients between prime brokers was accomplished. The industry has skirted around wide-spread upheavals and has instead seen most clients settle with new principal prime brokers or else easily diversify the range they use.
Credit Suisse has been one of the biggest beneficiaries in 2009. The bank has used the past 12 months to consolidate an already positive reputation. Credit Suisse has benefited not least thanks to an extremely prescient decision early in the year to bulk up its capital introductions team at a time when banks elsewhere were downsizing theirs. As a result, Credit Suisse has been prime broker to 18 launches in 2009 in Europe alone.
As hedge funds emerge from months of painful redemptions, 2010 looks set to be a good year for the bank too.