Heavy lifting aheadAbsolute Return, April 2009
Subheadline: "Faced with constraints on precious capital and a shrinking client base, prime brokers struggle to profit from an industry in flux."
S3 Partners citations:
"If you're taking a pool of collateral out of the prime broker and giving it to custody banks, you're hurting the prime broker," says Bob Sloan, the former global head of prime brokerage at Credit Suisse who is now a managing partner at S3 Partners, a prime brokerage risk and collateral manager that represents hedge funds in their day-to-day dealings with their prime brokers and other counterparties. "What you're doing is taking gas away from an engine and asking, why is gas getting so expensive?" It's also not clear that custodial arrangements necessarily diminish risk. The rights and obligations that custody banks apply to collateral held in their accounts can be just as one-sided as with a typical prime brokerage relationship. "In a lot of instances, having your assets at a custody bank is much more risky than having them at a broker dealer," says Sloan. "It's a knee-jerk reaction. When you actually get into the weeds of this stuff, you find it's not that simple. I'm not questioning the motive, but the execution has been done very badly. If the goal is 'Let's have my money be safe and controlled and know what it's costing me,' they haven't achieved that goal."
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