Prime Brokers Overview

   Credit Suisse’s slide to No. 5 this year is a reflection of just how competitive the prime brokerage field has become. Credit Suisse is still gaining traction. It scored a major coup earlier in the year when it was hired as lead prime broker for New York–based Old Lane Management, a $3.5 billon hedge fund firm formed by a group of high-profile former Morgan Stanley executives.

   Unlike some of its rivals, Credit Suisse has taken a very targeted approach to prime brokerage. “We are a high-touch prime broker with a relatively low ratio of clients to representatives who service them,” says Philip Vasan, global head of prime services with Credit Suisse in New York. “This comes by maintaining a deliberately handpicked client base.” In contrast to Morgan Stanley and Goldman, each of which has upwards of 700 hedge fund clients, Credit Suisse says it has chosen to service just 400 managers.

   Deutsche Bank is also moving up in the eyes of its clients — and in the rankings. The big German bank has been extremely active in building up its prime brokerage business, hiring 40 people this year alone, including several senior executives. It places No. 6 overall in this year’s Alpha Awards, rising one place from 2005.

   Known for its expertise in credit derivatives, swaps and other synthetic securities, Deutsche is launching a fixed-income prime brokerage business. It recently hired Mel Gunewardena from Goldman to run it. The bank has also been expanding its geographic range to countries such as Pakistan and other Asian emerging markets, says Mark Haas, the firm’s global head of prime brokerage.

   Even firms that finish lower down in the ranking are showing strength. New York–based investment bank Lehman Brothers is plowing more resources into prime brokerage. Two years ago, Lehman combined its equity and fixed-income prime brokerage groups — and it is benefiting from hedge funds’ increasing enthusiasm for bonds, where the firm is known to have a strong franchise. Lehman ranks in the top five in four categories — algorithmic trading, financing, securities lending, and trade execution and trading technology. It wins algorithmic trading, which has become an important product offering for most prime brokers.

   Even Merrill Lynch, No. 10 overall among prime brokers in our survey, may finally be starting to live up to its potential after several false starts the past few years. The bank has been building its prime brokerage resources. Last year it hired Jeffrey Penney from Morgan Stanley to build its equity derivatives; this year he was given responsibility for global financing, including prime brokerage. Clients say the firm is already much improved. Merrill finishes No. 3 in financing and No. 4 in securities lending, two staples of the business.

   Does the increased commitment from investment banking rivals like Merrill and Lehman, not to mention the major push being made by the big European banks, worry market leader Morgan Stanley?

   “Obviously, we take our competitors seriously, but quite frankly, this has been going on for 15 years,” says Portogallo.

   Morgan Stanley’s Mortimer says that many firms don’t really understand the enormous effort and resources that firms need to put into the basic blocking and tackling work of prime brokerage. As a result, he adds, these firms either lose their enthusiasm or produce a lesser-quality product.           — I.R-S.