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New Model For Hedge Fund Prime Brokerage?

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Nirvana Solutions’ White Paper Predicts the Emergence of a New Model of Prime Brokerage – The Multi-Prime Service Platform

San Francisco – June 15, 2009 – The financial crisis of 2008 has upset the relatively stable equilibrium previously maintained between hedge fund managers and their traditional service providers, according to a white paper released today by Nirvana Solutions, provider of Nirvana (TM), a real-time portfolio management system for multi-prime hedge funds, prime brokers, and fund administrators.

The white paper, entitled “The New Model of Prime Brokerage – The Multi-Prime Service Platform,” documents the dynamic changes to the hedge fund industry and its service providers in the aftermath of the 2008 market crash. Peter Curley, managing partner at Nirvana Solutions, examines how the roles of traditional service providers have changed, leading to the emergence of a new service model providing the full range of hedge fund services through a single, real-time multi-prime infrastructure built on a common, outsourced technology platform.

“The profound impact the crisis has had on hedge funds has already been well- documented,” Curley said. “Another significant outcome of the crisis, we feel, will be the aggregation and convergence of services provided to hedge funds through a single service provider. This new service provider cannot be adequately described as a mini-prime or a fund administrator but rather a hybrid of both, a model we are calling The Multi-Prime Service Platform.”

New requirements, such as multi-prime technology that can provide real-time views of critical data such as exposures and risk, and impending hedge fund regulation, are now converging to significantly increase the barriers to entry for new hedge fund managers. The operational efficiencies achieved through The Multi-Prime Service Platform promises to provide the critical sub-$500 million segment of the hedge fund industry–where the tension between the new requirements and the hedge funds’ ability to pay is at its most intense–a cost effective, fully integrated solution providing real-time transparency in a multi-prime environment.

To download the white paper please visit: www.nirvanasolutions.com.

New Model For Prime Brokerage Whitepaper

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About Nirvana Solutions (www.nirvanasolutions.com):

Founded in 2006, Nirvana Solutions is a San Francisco based software company that provides real-time portfolio management systems to multi-prime hedge funds, prime brokers, and fund administrators. Nirvana™ is the hedge fund industry’s first portfolio management system built around the Financial Information Exchange (FIX) protocol. The ability to dynamically accept FIX messages, combined with the aggregation of multi-prime data, ensures true real-time views of critical measures such as P&L and Risk. Nirvana’s ability to offer real-time transparency is complemented by a full suite of on-demand and historical reporting. The Nirvana solution is made available in an easy-to-deploy Software as a Service (SaaS) model and can be implemented in a modular or complete fashion.

For Further Information, please contact:

Peter Curley
for Nirvana Solutions
(415) 513-8950
[email protected]

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Please contact us if you have any questions or would like to start a hedge fund.  Other related hedge fund law articles include:

Bunched Orders and Separately Managed Accounts

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Separately Managed Account Managers May Bunch Orders for Better Execution

One reason why the hedge fund structure is so popular with investment managers is that a single investment strategy can be implemented in one account.  Separately managed account managers, however, often have multiple accounts and need to execute the same transaction in each of those separate accounts.  Not only is this more time consuming than entering a single trade, there is the possibility that some accounts would receive poorer execution than other accounts (if the trades cannot all be executed for the same prices).  To combat this problem, many brokers offer “bunched” orders which allow a manager to enter into a trade (or series of trades) and then allocate those trades to individual accounts pursuant to a pre-defined allocation method.  In this way trades are allocated to accounts in what may be deemed a more “fair” way.

Types of Bunched Account Allocation Methods

In the event a bunched order is not filled at one total price (called a “partial fill”), there are two central ways to allocate trades to individual accounts from a bunched order – average pricing or high-low.

Average Pricing

Under the average pricing method, the broker’s back end will add up all of the buys or sells at their particular price levels, multiply the trades by the number of contracts (or securities) at each particular price level, and divide by the total number of contracts (or securities) to determine an average price for the whole bunched order.  The trades are allocated to the individual accounts and the price for the trade will reflect the average price.

High low

Under the high-low method, the higher fill prices will be allocated to the higher account numbered clients for both buys and sells, and the lower fill prices to the lower account numbered clients for both purchases and sales.

Issues for CTAs and Investment Advisors

Generally, separately managed accounts fit within the realm of commodity trading advisors and investment advisors.  However, many hedge fund managers are beginning to take on separately managed account clients as well.  The central issue for any of these managers is going to be how the allocation process is described in the investment advisory brochure/contract, disclosure documents or offering documents.  Managers will need to make sure that this issue has been discussed with both the attorney and the broker so that everyone is aware of the actual mechanics of the allocation.  Additionally, I recommend that the broker’s back office review the disclosure documents to ensure that the allocation language is accurate and precise.  If the offering documents state one method and the broker uses another method, there may be some liability for the manager.  Additionally, if the manager is ever subject to examiniation by the SEC, NFA or state securities division, this could be a topic for review.

For hedge fund investors, part of your due diligence process should be to find out whether a hedge fund manager also manages separately managed accounts with the same investment program as the fund.  If so, the investors should ask the manager to explain the allocation process for trades.  While this should be disclosed in the offering documents I have a hunch that this issue is often overlooked by many funds – especially those funds which enter into the SMA agreements after the fund has been in business for a period of time.

Please feel free to contact us if you have any questions on this article or if you are interested in starting a hedge fund.  Other related articles include:

Hedge Fund Soft Dollars – Permitted Soft Dollar Practices

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This memorandum contains information regarding eligible and ineligible uses of soft dollars within the safe harbor found under Section 28(e) of the Securities Exchange Act of 1934.  This memo is structured in three parts: (i) discusses, generally, the eligibility of research services; (ii) discusses, generally, the eligibility of brokerage activities; and (iii) discusses, generally, mixed-use items. Continue reading →