26 Apr 2012
Creating a Fair and Balanced Relationship with Your Prime Broker
The issue of who controls an investment manager’s assets is in the news once again. The New York Times ran an article yesterday regarding the failure in 2008 of Copper River Partners, a short biased hedge fund. The message is clear. Knowing and enforcing your rights are paramount. S3 has seen this play out before and we remain especially vigilant today knowing that the infamous "once in a 100 year event" can occur every couple of years.
The article provides a road map for understanding the true risks of prime brokerage agreements for investors and hedge fund managers in executing their trading strategies, namely:
- - Counterparty Diversification
- - Standard of Care
- - Default Events
- - Liquidation Rights
- - Committed Financing Terms
- - Right to Assign
- - Confidentiality
- - Securities Lending
Standard Prime Brokerage Agreements provide broker-dealers with broad control over a client’s assets. This should come as no surprise to clients and investors who are familiar with their documents. Broker-dealers provide essential services to the hedge fund industry. Facilitating short selling and providing leverage on long positions is inherently risky. As such, constructing a fair and bilateral agreement is crucial to an asset manager’s business. S3 advises its clients on how to maintain the balance between prime brokerage service and trading benefits and the risk and costs associated therewith.
The past several years have provided real examples of what happens when a broker-dealer terminates a client. S3 understands that counterparty documentation must not only address normal day to day trading activity but also the “what if” scenarios of a default by either party. In either scenario, the primary goal is to preserve investor capital and the hedge fund manager’s franchise.
S3 helps its clients strike a balance between maintaining a good relationship with their prime broker and meeting their obligations to their investors. Put S3’s experience and knowledge to work for you.
To read the article, click here.