Section Three: Service Providers

3.1 Execution & Prime Brokers

Prime Brokers: Prime Brokerage is the provision of custody and fnancing services by a bank to a hedge fund, and has evolved to include a broader defnition of ‘Prime Finance’ that for most frms includes:

• Custody & Asset Servicing • Margin Finance • Stock Lending

• Synthetic Market Access or Stock Lending (via ‘Derivatives’ or ‘Swaps’) • Derivative Clearing

The leading Prime Brokers offer these services across all fnancial asset classes (Equities, Fixed Income, FX, Commodities) and can facilitate clearing, custody, and fnancing in all major global markets.Hedge Funds are charged a basis point fee for clearing and custody of assets, fnancing provided via margin, and then charged trade fees for borrowing securities and trading derivatives. These fees are negotiated with the prime sales team who will be proposing the hedge funds business to internal risk, credit, client service, and trading teams.

Since 2008 and the fnancial crisis, the majority of hedge funds have more than one Prime Broker, a structure referred to as ‘Multi-Prime’. In this model, the hedge fund has two or more prime brokers and separates balances between the counterparties in return for level of service and provision of broader services within the bank. The move to Multi-Prime has been driven by a requirement to spread exposure and risk across different counterparties and not have all assets held with just one Prime Broker.

Prime Brokers also provide additional non-trade related services such as Capital Introduction and Business Advisory to help hedge funds raise capital and develop their businesses across all of the required disciplines. For a list of Citi Business Advisory services see the appendix of this guide.

Execution Broker: At the outset of the fund launch you will need to identify which executing brokers you require in order to execute your fund strategy. The majority of the large broker-dealers are registered in all major markets and can provide global access to all products as you determine your trading requirements. You will begin negotiating terms on execution fees and margin requirements with each trading counterparty and your legal counsel will be involved in this process. Key trading and collateral documents will be required to be completed alongside forms for credit and background checks for the frm and the partners.

• Administration of fund bank accounts

• Production of fnancial statements & tax documents • Regulatory reporting services

Each Master Feeder fund will have a single administrator, but there are examples of the investment advisor using different administrators for different funds under management. The majority of U.S. fund managers have a single relationship but there is no defned standard.