Prime Brokerage - Is it for me? - How do they make $? - Eagles Investors

A prime brokerage is a distinctive group of services that several brokerages provide to their clients who have financial needs which are more complex when deciding to make any investments such as stocks, bonds and so on. You often seek help from a broker who will carry out the trades for you.

Nowadays a lot of investors make use of discount brokerage firms that allow you to trade online and give you advise and research reports. On the other hand, if you were a large hedge fund dealing with large sums of money. Or if you had large amounts of borrowed money, you were using to maximise your returns; then you would require special assistance from a prime brokerage.

Prime Brokerage

HEDGE FUNDS AND THEIR NEEDS

For your better understading of prime brokerages, you first need to get a grasp of what hedge funds are and the services they offer.

A hedge fund is an investment fund that uses pooled funds and a variety of strategies to earn significant returns even when markets are down. Usually, they borrow funds in an attempt to increase profits. The needs of hedge funds are a lot different from the requirements of an average individual’s needs. Mainly due to their level of investments and their approach.

Apart from that, other services that prime brokerages offer include :

Borrowing 

A prime brokerage helps hedge funds with extra cash that will help in boosting their returns. They also assist them in short selling which is selling borrowed stocks.

Acquiring new investors

A prime brokerage usually offers “capital introduction” services, whereby they advertise hedge funds to potential investors by making presentations and organising meetings.

Access to research

A prime brokerage often has very quick and effective research sectors that can provide almost any information needed by a fund manager in some situations.

Beware of regulatory issues 

In finance, the organisational aspect is quite complex. So complicated that hedge funds on their own may not be able to foresee all potential changes in the rules. Therefore prime brokers will come in as an advisor in this aspect.

Serving as a custodian

A prime brokerage having custody of a fund’s assets is what makes all the other services exist. It allows a prime broker to take action on trades more swiftly and give financial reports more efficiently.

Other services

Other services depending on the broker may include lines of credit, performance analytics reports, administrative tasks, and employee training.

Prime Brokerage

HOW DO PRIME BROKERAGES MAKE MONEY?

Prime brokers have the potential to be quite profitable. Because there are several ways in which they can earn their money. A prime brokerage can earn money from charges made on concierge services custody services and more. The prime brokerages receive a substantial amount of money from interest rates included with the borrowing and lending procedures.

Furthermore, a prime brokerage can use the insurance from clients to make their investments. This process is called hypothecation. Funds will give prime brokerage permission to do this with a condition of the reduction in fees. This process is precarious because the prime brokerage can lose the investment that was not theirs.

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