Prime brokerages take it on the chin again
Aug 15th, 2007 | Filed under: Hedge Fund Industry TrendsPrime brokerages have had a bit of a rough ride recently. Although they continue to make oodles of money, critics of their transparency (see related posting) and marketing practices (see related posting) have become more vocal (likely because they are a license to print money).
Now the Economist is piling on. In this week’s Buttonwood column, the magazine suggests that concentration in this industry may increase systemic risk in global capital markets. The magazine acknowledges that hedge funds may indeed make for a “more robust financial system” by allowing risk-averse investors such as banks to package and sell off those risks. But it also says the diversification benefits of dispersing these risks are only superficial if all of the investors who buy them use the same prime brokerages (for example, Goldman Sachs, Morgan Stanley, and Bear Stearns, who are prime brokers for 60% of all hedge fund assets).
The article uses the following example to illustrate why this could be a problem:
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