The two largest prime brokers are Goldman Sachs and Morgan Stanley followed by smaller service providers such as Citigroup, JP Morgan (who acquired Bear in 2008), Merill Lynch and UBS. However with the subprime crisis the market is and will be redistributed.
The first prime broker services were established during the 1970s and the 1980s by brokerage firms who saw business opportunities in offering a range of services to hedge funds and other professional wealth managers.
Until then, these firms had many administrative liabilities that did not belong to their core businesses, such as consolidating positions from different brokerage houses, performance measurements, and reporting functions.
Prime brokers offer the ability to manage all transactions in one centralized master account, which manages all cash and securities positions for the fund or manager. As hedge funds and their trading strategies became more sophisticated, the need for more comprehensive services grew significantly.
Nowadays, the core services cover settlement, custody, and clearing of all kinds of assets (i.e., equity, fixed income, swaps, warrants, derivatives), security lending of captive and noncaptive assets, financing (leverage), portfolio accounting and reporting (i.e., daily and monthly reports, performance analysis), risk analytics, cash management, trading services, and technical and operational support (i.e., for pretrade research, multi-asset trading, order entry, etc.).
Most prime brokers offer additional “value-added” services as well, such as capital introduction, office space lending and servicing, risk management advisory services, and consulting services.
Prime brokers generally do not charge one seftfee; they take a percentage of clients’ trading activities. Their major sources of income are the financing and lending spreads on long and (especially) short cash, and the security positions of the client. However, prime brokers may also charge fees for clearing and other value added services.
Prime brokerage has become an increasingly important business segment over the last few years, with revenues of U.S. $5 billion at the end of 2004 and estimations of about U.S. $11.5 billion at the end of 2009 (Celent, 2004).
As revenue has grown, the business has also become more competitive, with more providers entering the market. Furthermore, while historically hedge funds had only one prime broker, in 2006, three-quarters of the largesfthedge funds with more than U.S. $1 billion under managemenfthad at least two prime brokers. Nowadays, smaller funds also tend to employ more than one prime broker.