(This article first appeared on Hedge Fund Intelligence)
Goldman Sachs remains the top hedge fund prime broker in the Americas for a fifth consecutive year, followed by J.P. Morgan and Credit Suisse.
While assets measured by the ranking increased overall by 1.4%, assets declined at the top four firms, and their market share decreased slightly, to 55%, down from 57% a year earlier. Assets primed by the top 10 firms declined by less than a percentage point.
Of the top six prime brokers, only Morgan Stanley increased assets primed in the past 12 months, while the smaller prime brokerage divisions of Bank of America Merrill Lynch and Barclays Capital experienced growth in assets of 15.16% and 27.62%, respectively. Smaller prime brokers in the broad “Other category increased assets primed to 14% of the total, up a percentage point from last year.
Overall, there were no large changes in the rankings, with industry assets still concentrated tightly among the top four prime brokers (the only ones with individual market shares of 10% or more), and the ratio of funds using more than one prime broker also remained stable.
Last years rankings showed a shift from sole mandates to more split mandates as hedge funds diversified their counterparty exposure. This year, however, the ratio of sole to split mandates remained roughly the same, with just over half of funds opting for a single prime broker. Funds employing more than one prime broker are signed up with an average of 3.4, almost exactly the same ratio as last year.
Strategies
Goldman Sachs retained its dominance among funds managing equity and macro strategies. J.P. Morgan overtook Goldman Sachs among funds managing relative value strategies and the bank maintained its standing with credit funds. Of the four strategy categories, relative value was the only to suffer a decrease in assets in the past 12 months (dropping 8.6%), with poor performance and investor redemptions affecting a few of the group’s underlying strategies.
Weve seen a slight decrease in AUM for those strategies, and some of it has been performance based, said Dean Backer, global head of sales and capital introduction in the Prime Services business at Goldman Sachs.
Outlook
In Q&As conducted alongside the rankings,Credit Suisse, Deutsche Bank, Goldman Sachs and J.P. Morgan offered mixed responses regarding hedge funds’ use of leverage. While J.P. Morgans Jason Sippel noted no significant change in leverage over the year, Backer said Goldman Sachs noticed an increase in gross leverage, with added risk in January amid the global equity sell-off and more appetite for risk starting in May, only to be derailed by Brexit fears in mid-June.
Credit Suisses Indrajit Bardhan said he expects funds to maintain their cautious stance for some time, though quantitative funds have shown an increased appetite for risk after a strong first quarter.
Bardhan also noted that fewer managers were striking out on their own, instead opting to join established firms. We are working with some of the biggest multi-manager funds to source PMs, as its easier to join such platforms than open them separately.
The respondents did not expect to see many launches garnering $1 billion or more this year. Sippel expects no more than one or two $1 billion launches and Bardhan anticipates an “increasing number” of funds preparing to launch in 2017.
