New York, NY, USA
October 20, 2004
The Burgeoning Business of Prime Brokerage
Report Published by Celent
Global prime broker revenues for the five years
ending 2004 reached US$5 billion. Over 2005–2009, Celent anticipates
that they will reach US$11.5 billion.
 In
a new report, The Burgeoning Business of Prime Brokerage,
Celent discusses key market trends in the prime brokerage industry and
pays particular attention to technology developments. A case study shows
how one prime brokerage firm is using technology to deliver immediate
access to core infrastructure for fund managers. The report also outlines
current and future challenges for prime brokers in the face of a hedge
fund boom that will inevitably wane.
The current leading prime brokers are Goldman Sachs,
Morgan Stanley, and Bear Stearns; together, they represent 55 to 65
percent of the market. However, this is set to change with the explosive
growth of the hedge fund industry. Celent predicts that global hedge fund
assets will grow at an average annual rate of 16.5 percent over the next
five years, reaching US$2.1 trillion by 2009. This growth will perpetuate
demand for prime brokerage services at all points of the hedge fund life
cycle.
Other changes in the industry—including new
technology, market structure changes, growth in a derivatives market that
is increasingly complex, and bank consolidations—will modernize firms,
enable cross-asset class servicing, and spur innovation in prime
brokerage. For the first time in the history of the industry,
capitalizing on changing dynamics is not restricted to the top few firms.
Prime brokers are aggressively adding services for
hedge funds, but many of these can be duplicated by fund administrators,
technology providers, and even outsourcing firms. Although the prime
broker is closest to hedge funds from an investment and operational
perspective, funds are reluctant to allow any one firm access to all their
investment activity. As hedge funds grow, they bring more administrative
and operational activities in-house, or centralize activities with a third
party.
"Although prime brokers are
currently enjoying revenue and growth opportunities, a word of caution is
in order. This growth may be concealing a few flaws," says Denise
Valentine, Celent analyst and author of the report. From a
technology perspective, prime brokers are still coping with legacy back-
and front-office systems. From a target market perspective, the boom of
new hedge funds will slow with eventual fund failures. And it is
inconceivable to imagine that brokers’ current profit margins can be
maintained if expenses continue to rise, Valentine adds.
This 36-page report contains 10 figures and
three tables. A table
of contents is available online.
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