In our September 24, 2009 issue, we discussed the bifurcation in the prime brokerage business created by the financial crisis and the emergence of smaller prime brokers filling the services void left by the focus of larger prime brokers on their larger hedge fund clients. See “Boutique Prime Brokers are Emerging to Provide Services to Small and Mid-Size Hedge Funds Marginalized by Larger Prime Brokers
,” Hedge Fund Law Report, Vol. 2, No. 38 (Sep. 24, 2009). That article pointed out that certain smaller prime brokers now offer prime brokerage, custody, clearing and financing to smaller clients. See also “Hedge Funds Turning to Prime Brokerage Trust Affiliates For Added Protection Against Prime Broker Insolvencies
,” Hedge Fund Law Report, Vol. 2, No. 25 (Jun. 24, 2009). Now, a new report by Aite Group, LLC, entitled, “Trends and Firms in the Prime Services Market, 2010,” describes how, over the last five years, this new class of prime services providers, called “mini primes,” has proliferated. Most notably, some of these firms, not so mini anymore, have steadily moved up the hedge fund totem pole to larger accounts. Revenues for these providers in the prime services market as of year-end 2009 totaled $278.3 million, with about 2,300 clients, many of them hedge funds. The Aite Group report examines in detail how some mini primes view their business, relying on interviews with leading providers. The report also explores how the business of prime brokerage has changed, profiles the interviewed mini primes, and describes the prime services market trends. Furthermore, the report projects a steady average annual growth in assets under management of 7.4 percent for hedge funds in the upcoming year. This article details the most salient findings of the report and its implications for the hedge fund industry in 2010.