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What is a Prime Brokerage?

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  • Written By: A. Leverkuhn
  • Edited By: Andrew Jones
  • Last Modified Date: 11 September 2016
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A prime brokerage is a specialized kind of brokerage service geared towards professional investors such as the operators of hedge funds. These types of brokerage services help these investors to perform complex investment strategies that will limit their risk while producing desired gains. A brokerage of this kind provides diverse services to a corporate or professional client.

The main role of a prime brokerage is usually to provide a centralized process for “netted” investments. When a professional investor takes both long and short positions in equities or other investments, the final result will be a “net gain or loss.” By investing in both long and short positions, some clients can recognize what’s called an absolute gain, where some kinds of risks are effectively avoided.

The prime brokerage will help to facilitate the kinds of complex investing that limits risk for investors. This includes managing global financial accounts, and providing accurate reports of investments on a regular basis. The prime brokerage may also help to finance some of the positions of a client.

Along with monitoring the combined long and short positions that provide netted gains, the prime service brokerage may also offer “value added services” or extra help to a client. The prime brokerage may help clients to find the best investment offers that will complement their existing positions. The prime brokerage might even help to deal with practical considerations for a client such as setting up office spaces.

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In exchange for all of this assistance, the brokerage offering these services receives various commissions and fees. Many of these are related to specific transactions. The brokerage can also request separate compensation for additional services.

In the relatively early years of these kinds of brokerage operations, these services were largely involved in equity investments. Today’s prime brokerage services may be more focused on diversified products like Exchange Traded Funds(ETFs), mutual funds, or other kinds of investments. As the complexity of services and investments grows, it’s essential for a prime brokerage to be able to accurately judge the risks of certain investments.

Many investors do not need the services of a sophisticated type of brokerage to manage their portfolios. A simple online brokerage account will provide intraday trading services. Some of these traditional brokerage accounts will offer assistance with opening long and short positions, as well as ongoing monitoring for these positions. The prime service brokerage is a specialized service for those who need to guarantee returns on complex investments.

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