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The Evolving Dynamics of the Hedge Fund Industry

The changing nature of prime brokerage relationships

Regulations enacted subsequent to the financial crisis intended to reduce market risk are directly impacting the manner in which prime brokers service the hedge fund industry. These regulations put in place as a result of the Dodd-Frank Act and Basel III have changed the basic ability of prime brokers to offer financing and maintain hedge fund assets. Increased focus on optimisation, capital liquidity, funding and the balance sheet have impacted banks’ capacity and economics, resulting in an evolution in how prime brokers view hedge fund relationships. Prime brokers have increased focus on balance sheet and collateral management, and are re-pricing clients when necessary. Relative to other challenges highlighted in this study that have been playing out for many years now, the evolving prime brokerage environment is in the growth phase of its life cycle. It will be a long time before we understand the full effects of the changes, though we do know the impact will be felt across the board — from prime brokers, to investment managers, to investors.

Fig.1 Hedge funds For each strategy you offer, have your prime brokers increased pricing in the past 12 months? For each strategy you offer, do you expect your prime broker to increase pricing in the next 12 months?
Source: EY
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