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This article was authored by Sameer Shalaby, Paladyne Systems.

September’s financial crisis calls into question an unaddressed issue in the rapidly changing landscape of independent investment banking and prime brokerage: The reliance by some hedge funds on a single prime broker. In our opinion, the era of prime brokers securing and maintaining exclusive relationships with hedge funds is now over.

Hedge funds with single prime brokers – even firms with less than $1 billion in assets under management – are currently scrambling to balance their assets and manage risk by establishing relationships with new brokers. In the immediate future, many hedge funds will need to take measures to reduce their operational dependence on their primes, actively seeking greater independence and disaster recovery arrangements to protect their assets and operations from third-party shocks.

The risks of overdependence For hedge funds with a single prime broker, the sudden collapse of that relationship is devastating. When a prime goes belly up, a hedge fund can lose access to more than its assets; the fund’s very operations can be at risk.

For much of the last decade, prime brokers have offered hedge funds “free” technology as a value-add in their relationship. This means a hedge fund with no technology can gain access to a front-office trading platform, direct market access algorithmic trading tools and even back-office accounting and reporting technologies, ......................

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