Research depts at prime brokers could be culled if profits don't increase, warns top exec

People MovesPrime BrokerageSecurities Financing
27 Feb, 2012

Prime brokerage research departments are likely to be trimmed down or even shut completely if hedge fund trading volumes do not pick up, a senior executive at a major prime broker in New York warned.

“The Volatility Index stands at about 17, while interest rates are near zero, leverage has been continually reduced and there are low aggregate trading volumes – all of this means prime brokers are going to have to cut their costs and research is one area which is going to be first in the firing line,” said the executive, who did not want to be named.

Prime brokers have struggled over the last few years as multi-priming has eaten into their profits. Concerns over the eurozone and disappointing growth figures globally have also led to hedge funds trading less.

“Services like cap intro will stay but the commodities services, which are parts of the business, which do not generate revenues directly, are under threat. Word on the street is that a lot of researchers are packing their bags,” said the executive.

The potential research cull is also down to hedge funds’ reluctance to pay for the service. “There was so much research which hedge funds did not want to pay for. Researchers typically charge between $400,000 and $600,000 annually - but hedge funds don’t want to pay for this. Research is no longer profitable for the prime brokers. When April comes, I suspect there will be a lot of lay-offs in these departments across the board,” he said.

The source added sales teams which were not meeting performance criteria or profit targets were being laid off too. Several prime brokers have been scaling back their operations. Mid-tier investment bank Jefferies, for example, is in the process of combining its prime brokerage and securities lending operations in light of its credit rating downgrade and the MF Global collapse.

It was revealed last week that two members of Jefferies’ fixed income securities lending team had left for Lazard Prime Finances. The executive told COO they were Gerry Reilly and Greg Caruso. This comes very shortly after James Davis, head of sales for Jefferies in Dallas, left.

The source added he anticipated mini-primes, organisations which cater to smaller hedge funds, will also continue to shut or merge. “Mini primes, which have not invested in technology or those which have competed on price are losing clients and really do not have much going for them in 2012,” commented the executive.