Why having only one prime broker is a bad idea

When conducting business continuity planning you aim to identify all single / critical points of failure and implement measures to eliminate them to the extent this is possible.

In which case, why did 33 hedge funds in Europe give Lehman a sole prime broking mandate with the result that their assets are now frozen and their prime brokerage contacts are unavailable to assist in almost all cases?

Recent examples at Bear Stearns and MF Global should have provided enough of a wake-up call to every hedge fund about the dangers of concentrating all your business in one place. Whilst those assets should be segregated and hence ring-fenced from those of Lehman, inability to access them in turbulent markets renders the funds hapless.

Setting aside the other benefits of operating with 2 or more prime brokers which is the obvious answer to the identified risk e.g. you remain closely attuned to price/service differences between firms, there are usually higher direct [fees paid] and indirect [netting opportunities foregone] costs to bear from distributing business. Yet one has to wonder if the managers in question were incompetent or plain stupid, since the consequences of a risk event occurring dramatically outweigh versus the costs of cover.

According to the FT, another 67 firms that were prime broking clients of Lehman are also affected by its' demise, but they had in place alternate prime broking arrangements, so are able to access some of their fund assets and continue to trade.
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posted by John Wilson @ 9:07 AM Permanent Link newsvine reddit


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