BAML wins prime broker mandate for Paris hedge fund

Fri Mar 23, 2012 1:43pm EDT

* BAML hired as Bernheim, Dreyfus & Co's second prime broker

* Comes after BAML hired ex-UBS bankers last year

* Banks battling to win hedge fund clients

* But margins under pressure, sector seen as over-broked

By Laurence Fletcher and Tommy Wilkes

LONDON, March 23 (Reuters) - Paris-based hedge fund manager Bernheim, Dreyfus & Co appointed Bank of America Merrill Lynch (BAML) as its second prime broker, the latest win in a sector where many banks are struggling to break into the lucrative top tier.

Bernheim, Dreyfus, which manages $200 million in assets and which tries to make money by betting on M&A (mergers and acquisitions) deals, said on Friday it would split its activities between BAML and existing broker Newedge.

The mandate marks a step forward for BAML in the ultra-competitive business of prime broking, which involves services such as providing finance and raising capital for hedge funds.

The win for BAML - in a sector led in Europe by the likes of Goldman Sachs, Morgan Stanley, Credit Suisse and Deutsche Bank - comes after a huge hiring spree in recent years to beef up its business.

Last summer it hired former UBS bankers Stuart Hendel, who became head of global prime brokerage, Charlotte Burkeman, who was appointed co-head of EMEA prime brokerage, and Jonathan Yalmokas, who became head of U.S. prime brokerage.

The bank has also recruited Michael Terry as global head of capital introduction and Daniel Katz as head of EMEA stock loan and structured marketing last year, while Eddie Guillmette left his position as EMEA head of prime brokerage sales early last year.

"One thing that was very important was that it's one of the biggest-capitalised banks," said Bernheim, Dreyfus partner Amit Shabi. "The capital introduction team at BAML is very, very serious ... They seem to have a very, very close relationship with hedge fund investors."

The win comes amid furious competition between banks to gain market share in a sector which some see as having too many suppliers.

Banks have dived into prime brokerage since the credit crunch, when some managers found their assets frozen at collapsed bank Lehman Brothers in late 2008.

GREAT CHANCE

Funds have typically raised the number of prime brokers they use to three, creating opportunities for banks to win business, knowing it offers a great chance to sell other products to hedge funds they sign up.

Moreover, continued client inflows into the $2 trillion hedge fund industry offers growth for banks, just as areas like proprietary trading are cut back by regulation.

"Banks are super-keen for prime brokerage business," said the chief investment officer of one London-based hedge fund firm, who asked not to be named. "It's collateralised lending. Banks are definitely focused on it."

One prime broker, speaking on condition of anonymity, said: "I think people recognize there is $3 to be earned for every $1 just from having a captive hedge fund client, so people are really being quite aggressive."

However, banks are also facing high set-up costs to enter this business, while the high number of players in the sector has put pressure on margins.

"There is a certain amount of denial on the funding side. I think the prices that are being offered competitively right now to some of our clients are still somewhat unrealistic about where the future of finance is going," said the prime broker.

"It is so competitive. It is an over-brokered space."

Nevertheless, many banks have tried to capitalize, building their prime broking units by poaching veteran staff from rivals and spending millions on technology in the belief they could win business from Morgan Stanley and Goldman Sachs, the dominant players in the sector before the credit crisis.

Some, such as Credit Suisse and Deutsche Bank, have raised their market share, but growth is unlikely to have been shared across the dozen or so banks now active in the sector.

According to data from Hedge Fund Research, JPMorgan was the biggest prime broker globally in the third quarter of last year, thanks in large part to its position in the United States, although its share had fallen to 27.9 percent of assets from 29.4 percent.

Goldman had 20 percent and Morgan Stanley 13.6 percent.

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