This article mainly briefly introduces the business of hedge funds in my work experience:
Hedge Funds:Use wide range of complex and sophisticated Investment Strategies
- Investment Vehicles
- Big Bets
- Wide range of assets
- Specialise in sophisticated investment techniques
Prime Brokerage is a desk that provides various services to hedge funds:
What is Custody (fund custody), mainly to protect the client's assets: (cash, securities, bonds, commodities...)
Clearng...who owes money to whom? who now owns theses securities?
settlement...Transfer of ownership ,transfer of cash ,exchange for securities
Asset Servcing including... Dividend payments (interest rate settlement)Managing corporate actions.
Trade Execution:
PB’s can execute trades on behalf of clients or other brokers, and earn a fee for doing so…
Execution means Broker or dealer who finalises and processes a trade on behalf of a customer by different types of execution – Trading floor, electroninc (market makers), orders being filled.
Order to the floor --NYSE still uses this method today
internalisation--Broker fills order from it's own inventory
Electronic communications network(ECN)-- Automatically Match Buy and Sell orders electronically to fill an order
Order to Market Makers--Used on exchanges such as the NASDAQ
What is Margin?
Margin= Protection from Risk
Risk = Exposure to things which could harm you
Risk Management = Finding and measuring those risks so appropriate action can be taken
Margin = Is a way of identifying and protecting yourself from counterparty and market risk
Cash Management and Financing
Cash management and financing, traditionally performed by the Operations side of a Prime Brokerage.
Hedge Funds have LOTS of Cash,Manage client’s cash and provide them with returns on their cash holdings.
In it’s simplest form, financing is a floating line of credit, usually associated to an underlying benchmark like LIBOR.
Client Reporting
As a Prime Broker, we have an obligation to provide our Hedge Fund clients with daily reporting that is accurate and reflect the latest market data and client positions…