* 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 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
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
"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
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.
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.