4
I
Prime Custody: Achieving Asset Protection & Operational Simplicity
Prime Custody Ensures that Assets are
Segregated Away from the Broker-Dealer
Having this option to move excess securities into segregated
accounts, particularly if those accounts were held at a custody
bank, was seen as particularly appealing to institutional
investors in the immediate aftermath of 2008. As noted,
these investors are becoming an increasingly important source
of capital for the hedge fund community. Institutional investors
have long-standing experience with custodians and confdence
in their stewardship. whereas many of these same investors
were still new to the hedge fund space and uncertain about
how the nuances of the prime brokerage model worked.
In the months immediately following the Lehman Brothers
bankruptcy, hedge funds (supported by their institutional
investors) were looking at any option that allowed them to
move eligible assets out of their prime broker’s control and
thus remove some of their exposure to their prime broker’s
broker-dealer entity.
This “fight to safety” mentality was understandable in the
wake of traumatic market events. Hedge funds and investment
managers wanted vehicles that allowed them to reassure their
investors that they would be able to protect their asset base.
As the investment landscape began to stabilize in 2009, the
impracticalities of the segregation model offered by early entrants
became apparent. Hedge funds, investment managers and
investors all began to rethink their requirements and seek a
more operationally viable solution.
Chart 1: Comparison of Security Holdings & Investor Exposure