Bear Stearns has realised for some time that prime brokers will face significant new challenges from the growth of the hedge fund business not only in terms of size but also in complexity as this business continues to diversify.
This firm stands out among its contemporaries and competitors because the prime brokerage division of the firm is significantly sized in proportion to the organisation as a whole. The hedge fund business is a prime strength of Bear Stearns and this focus has resulted in an enhanced range of tools and expertise that are specific to this industry. As hedge fund diversity has continued to involve new markets, this firm's response has been to formulate innovative products that are reinforced by newly developed services.
There is an ever continuing evolution of the prime brokers' relationship to hedge funds. Recently, for example, the trend has been for many larger managers to pursue additional brokerage relationships. The result has been that, in a number of instances, the panel of prime brokers has grown to a size that is unmanageable. Consequently, is was determined that business complexity grew in proportion to the number of prime brokers involved and the current trend is for hedge funds to maintain a relationship with only a few prime brokers.
This has fuelled competition between prime brokers and they find themselves in the position of having to demonstrate their worthiness in order to be short-listed and prevail over their contemporaries for the reduced number of positions available in the hedge fund arena.
The European market is composed of investors who are attracted to larger-sized hedge funds that are managed in a more conventional and a more institutional manner. This means that a manager has a distinctly more difficult start-up potential since these institutional- styled investors demand strong operational platforms that include stringent compliance procedures.
The start up manager must be in a position to ensure that these investors will be provided with advantages of an established business, including service providers that are reliable. The manager must also formulate sound business policies that are supported by a staff that is highly experienced at every level. Bear Sterns took the needs of a start manager to heart when they created the model for their consulting group.
Now, nearly three years later, the larger proportion of Bear Sterns consulting group's interactions are with multi-billion-dollar global funds that need professional support to bolster their infrastructure to maintain and build quality practices. The associated institutional style managers anticipate that Prime brokers will instigate a wide range of capabilities and provide diverse investment strategies.
Sophisticated hedge funds are well supported by the program developed by Bear Stearns that includes an integrated fixed income, derivatives trading platform and equities. The Bear Stearns' DerivClear platform is a service intended for derivatives and facilitates margin management between numerous counter parties.
A new Global Equities has been recently instituted at Bear Stearns that includes prime brokerage, equities and structured products. This group demonstrates the integral component of hedge funds' to integrate and encompass multiple product areas.
To some extent, the demands made by institutional investors are undermining the importance of the formal regulations. For example, a recent legal challenge resulted in the withdrawal of the requirement for SEC registration for hedge fund managers. However, the meticulous scrutiny required by investor demand has raised the professional standards related to hedge funds beyond those that had been required.
Nevertheless, funds that employ a number of prime brokers and several lenders has made assessment difficult as to whether the financial markets are being put at risk by leverage strategies being used.
Bear Stearns has countered this problem by making monitoring of these and other risks a primary focus of the prime broker program. This approach has met with success, as demonstrated by the fact that this sector has experienced no defaults in almost 20 years. This is a result of the meticulous attention all of Bear Stearns' prime brokers continue to give to the degree to which their clients are leveraged which provides a safeguard to the financial world.