5 Functions of a Prime Broker

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Ever wondered what the high class, elites of society do with all their cash? Well, a lot of different things, for starters. But one of the things many people with large vasts of wealth engage in is prime brokerage services for professional traders. The people who work for these companies are what’s known as prime brokers.

Basically, prime brokerages are the places that hedge funds and investment firms utilize to get the cash they need and secure their own investments in order to get a healthy return down the road. According to Wikipedia, the prime broker services “provides a centralized securities clearing facility for the hedge fund so the hedge fund’s collateral requirements are netted across all deals handled by the prime broker.”

So what are some of the specific things they actually do? Here are five of the most common activities they engage in.

  1. Global Custody: Basically, this is a place to safeguard, or protect assets that a business/person doesn’t want to be invested in more traditional means (stocks etc.), but still need a safe place to store.
  2. Securities Lending: Securities lending and trading is an incredibly complex and confusing economic system of lending assets on the margins. It’s sort of like a loan and also allows investment firms and hedge funds to “sell short.” Entire curriculum’s have been dedicated to this field and it would require too much time to explain in detail here.
  3. Financing: In simplest terms, financing aims to price assets based on their level of risk and their expected rate of return, or return on investment (ROI). There are technically three sub-sets of financing: public finance, corporate finance and personal finance.
  4. Capital Introduction: This is when a prime broker tries to solicit a certain hedge fund investment opportunity to other hedge fund investors. Basically, it’s a form of sales/funding to grow and expand businesses.
  5. Risk Management Advisory Services: Risk vs. Reward. This is where it’s determined if something will be a good investment or not and why, how much the downside is etc.

The world of high-end economics and finances is an incredibly complicated and convoluted system — some would say not by accident — and requires an experienced and knowledgeable hand. Prime brokers are some of the people helping to do just that.

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