The prime brokerage industry is going through a turbulent time as some large providers have pulled out of the market in the last 12-18 months. This has forced a growing number of fund managers to rethink their approach to prime brokers. Rather than relying primarily on one big bank, an increasing number of mid-sized funds are engaging with multiple prime brokers. They are also having to be more selective about which firms to consider, most notably by diversifying counterparties to include non-bulge bracket providers.

Fund managers are casting their nets more widely than ever before when looking for a primary or secondary prime broker. Here are my top five tips for what to consider when choosing a prime broker.

1. Size matters: Choose the prime broker best suited to the size and ambition of the fund. The bulge-bracket banks, understandably, may be less willing to take on a fund with a relatively small amount of assets under management. These banks may also be less generous with their time and resources and have certain minimum revenue expectations.
2. Full-service capabilities: While all funds need strong operational support, state-of-the-art technology and solid risk management, additional requirements may vary according to the age and stage of the firm. In the case of emerging funds, for example, their needs could involve capital introduction or consulting. For established funds, they could involve service in a range of asset classes or detailed knowledge of regulatory regimes in a particular geography.
   
   Outsourced trading is increasingly in demand and therefore a prime broker with a multi-asset outsourced trading offering should be considered a very compelling partner. Outsourced trading does not necessarily need to be deployed across all areas of trading but can be a very efficient and effective route to expertise, scale and reach – improving access to liquidity, asset classes, markets and geographies.
   
   Fund managers must ensure that their needs are aligned with the prime broker’s capabilities, and that the prime broker will be able to handle their evolving requirements as they grow, and their needs evolve.
3. Robust risk management practices: Weak risk management practice is one of the main factors blamed for the well-publicised losses generated by some prime brokers last year, and the ripple effects are still being felt. Providers need the right tools, and perhaps more importantly, the right culture to mitigate such risks. The 2022 Global Custodian Prime Brokerage survey highlights, among other aspects, the top performers in terms of risk management. 
4. Outstanding service: High service levels are particularly important for many emerging and mid-sized firms. Seek a prime broker with a reputation for delivering exceptional customer service and a consistent dedication for emerging and mid-sized managers.
5. Strong track record: The right prime broker, whether in a lead role or as a secondary alternative provider, should have been in the business for a while, with a proven track record in providing good advice to its clients. Consistency in commitment to prime brokerage is the key – look out for strong stable performance, a robust business model and diligent client selection.