Prime Broker
A financial institution offering hedge funds integrated services including securities lending, leverage, and custody.
What is Prime Broker?
A prime broker is a large financial institution, typically a major investment bank, that provides a comprehensive suite of services to hedge funds and other sophisticated trading clients through a single counterparty relationship. Core prime brokerage services include securities lending (enabling short selling), leveraged margin financing, trade settlement and clearing, custody of assets, portfolio reporting, and capital introduction (connecting funds with potential investors). Prime brokers earn revenue through lending spreads, margin interest, and transaction fees. Major prime brokers include Goldman Sachs, Morgan Stanley, and JPMorgan. The collapse of a prime brokerage relationship can pose significant risk to dependent hedge funds, as demonstrated when the bankruptcy of Bear Stearns in 2008 forced several funds to quickly transfer positions to alternative prime brokers.
Example
A newly launched hedge fund opens a prime brokerage account with Morgan Stanley, which provides the fund with leverage up to five times its equity, stock borrow for short positions, daily portfolio reports, and introductions to sovereign wealth fund investors—services consolidated through a single institutional relationship.
Source: Investopedia — Prime Brokerage