In the past, prime brokerage was restricted to a select few large Wall Street companies, and while many of these firms provided prime brokerage services for large hedge funds, others were not so lucky. Because relationships with smaller hedge funds were not extremely profitable for such large companies, they often declined to provide the necessary services for them to succeed.
Smaller hedge funds are usually those with less than $50 or $100 million in assets, and as such they provide less opportunity for profit. Eventually, large prime brokers began to neglect these types of smaller hedge funds completely, which in turn paved the way for mini prime brokers.
These types of brokers are registered dealers that essentially act as introductory firms to other prime brokers, and handle front end relationships while trading, execution, and custody are taken care of through large prime brokerage firms.
Mini prime brokers play an important role for smaller hedge funds that need better support services. The discount services that brokerages normally provide simply aren’t cutting it for them because the companies are not yet big enough to provide the highly personalized services that bigger funds receive from large hedge fund prime brokers.
Mini prime brokers can do virtually everything that a regular prime broker can do, but the difference is the smaller, more personalized scale in which they operate in. In addition to brokerage and custody, many mini prime brokers also provide small and start-up managers with useful additional services. Such services can include soft dollar services, operational services, back office services, and sometimes even capital introduction services.
Many of these types of brokers will also provide their customers with complementary access to numerous popular trading platforms. Each broker will be able to provide different services and execution prices, depending on what they’re working with. So to ensure the best service for any one fund, a hedge fund manager should talk with a few before making a final decision.
In general, these kinds of brokers can provide the exact same services that a large prime broker can, and will, without a doubt, be better equipped and prepared to respond to a small fund’s needs. In addition, fund investors are generally more comfortable with the fact that any hedge fund?s assets will still be maintained at a large brokerage firm.