This contrasts with the experience of smaller hedge funds who are finding it increasingly difficult to engage a prime broker at all, with another manager, who also asked to remain anonymous because of the sensitivity of business relations, telling CNBC that unless funds were able to raise a significant amount of capital themselves – around $250 million – and demonstrate that they have the potential and capacity to generate significant trades, their business is increasingly unwanted by the larger service providers.
Given a recent wave of consolidation in the prime brokerage industry on the back of a wave of new regulatory obligations and a reassessment of profitability potential, the number of top-notch prime brokerage providers for hedge funds to approach has dwindled.
For example, RBS and Nomura shuttered some of their operations in recent years while UBS has restructured towards a more balance sheet-light model.
The result is a shrinking core of leading prime brokers, which now includes Goldman Sachs, Morgan Stanley, Deutsche Bank and JPMorgan on the equities side and Citi, JPMorgan and Barclays on the FX side.
Another manager told CNBC anonymously, again because of the sensitivity of the business, that whereas smaller funds used to have the luxury of multiple prime brokers, now they generally had only one, thereby reducing their ability to extract bargaining leverage or potentially switch up service providers as seamlessly as done by several of Deutsche Bank's larger hedge fund clients last week.
Press reports have intimated liquidity concerns were instrumental in driving the estimated 10 hedge fund clients to withdraw business from Deutsche Bank. The creditworthiness consideration has been of even greater concern for hedge funds given events following Lehman Brothers' collapse, when some funds that were prime brokerage clients of the fallen investment bank had their assets frozen until legal complications were resolved. In the more extreme cases, certain funds were only re-granted access to their assets recently despite Lehman Brothers' demise now occurring over eight years ago.