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he hit-TV series Billions has been critically acclaimed for
its likeness to the real world of US hedge funds, and in
one episode the show perfectly highlighted the impor-
tance of capital introduction. Bobby Axelrod, who is the head of
fictional hedge fund, Axe Capital, and played by Damien Lewis,
arrives at a capital introduction event at CitiField, hosted by
Spartan-Ives (a fictional prime broker). The event sees Axelrod
raise $5 billion from institutional investors attending the event,
after standing on a soapbox in front of a full room and pitching
his hedge fund to new backers with the help of his chief invest-
ment officer.
The scene will be familiar to those involved in the process for
its likeness to the reality of how hedge funds raise capital. They
very much rely on their prime brokers to connect them with
institutional investors that fit with their strategies.
The scene is also a reflection on how the biggest hedge fund
clients are provided capital introduction services. For the
majority of smaller and medium-sized hedge funds, the returns
they provide do not warrant the resources required for capital
introduction.
“Many of the bulge bracket primes are resource-constrained
and struggling more every day to support their client base; less
balance sheet, less competitive pricing, less cap intro and so
forth,” says Emma Sugarman, global head of capital introduc-
tion, Cantor Fitzgerald.
“Most of these resources are going to their top 100 clients
and there have not been additional primes to add supply to the
market - we want to change all of that. In addition, start-ups are
increasingly being serviced by even fewer primes.”
One of the biggest problems for hedge funds is the juniorisa-
tion of capital introduction teams at the big prime brokers. Many
of the most experienced and senior capital introduction experts
have left, largely due to the reduced bandwidth they can operate.
As a result, they are replaced with individuals that do not have
the same amount of expertise and the same amount of relation-
ship status with hedge funds and institutional investors.
Just this year, Citi and Credit Suisse
both saw the departure of their global
“Many of the bulge bracket
head of capital introduction. Martin
primes are resource-
Visaries, resigned after serving eight
constrained and struggling
years in Citi’s capital introduction team,
while Robert Leonard announced his
more every day to support
retirement following his 15-year tenure at
their client base.”
Credit Suisse.
Elsewhere, Deutsche Bank’s European
EMMA SUGARMAN, GLOBAL HEAD OF CAPITAL
INTRODUCTION, CANTOR FITZGERALD head of capital introduction, Sasha Tem-
ple-Jones, left after over five years at the
German Bank. Within a year, JP Morgan
lost both Melissa Carnathan, its European head of capital intro-
duction who joined hedge fund Tages Capital, and Alessandra
Tocco, the global head of the capital advisory group.
“The Street’s prime brokers continue to downsize and junio-
rise their cap intro teams, which is evidenced in some of the sen-
ior departures we’ve recently witnessed at some of the Streets
largest prime brokers,” says Tom Mahala, founder and CEO of
Layton Road, an outsourced capital introduction business.
“Cap intro has a significant operating budget at their invest-
ment banks, so smaller teams with less experienced profession-
50
Global Custodian
Fall 2018
als allows them to reduce the size of their
cap intro expense footprint. The victims
of these moves are the hedge funds and
institutional investors they serve.”
Mandates are focused on financing and
execution, with introduction and hedge
fund consulting services being an add-on
to win the larger hedge funds.
For the majority of small and medi-
“The Street’s prime brokers
continue to downsize and
juniorise their cap intro
teams.”
TOM MAHALA, FOUNDER AND
CEO, LAYTON ROAD
um-sized funds, the value-added services
are not granted to them, therefore they
become excluded from capital introduc-
tion. In addition, due to certain structural
misalignments, there are several types
of hedge funds that receive little-to-no
capital introduction services, as their
strategies do not reside within the equity
prime brokerage verticals of the big prime
brokers.
“For example, a CTA or Structured
Credit Fund is not likely to have a rela-
tionship with an equity prime broker, and
as a result, these funds will be orphaned
by the cap intro teams of those banks,”
adds Mahala.
“This creates a misalignment with in-
stitutional investors that utilise cap intro
teams to assist them in their sourcing of
hedge funds.”
Mid-tier prime brokers winning hedge
fund clients is not a new phenomenon.
They have been on the scene for a number
of years, and since the onset of the capital
rules, their rise has been viewed by
many. But many of their prime brokerage
services have been limited to financing
and securities lending, and very few offer
capital introduction.
Yet with more of the big primes down-
sizing resources and cap intro teams,
prime brokers like Cowen Group and
Cantor Fitzgerald see an opportunity.
Coupled with the shift in power be-
tween managers and their allocators, the
size of the prime broker is less likely a
factor in how hedge funds raise assets.
“As the supply/demand dynamic has