With many hedge funds recording a return to profitability through new trading strategies, banks offering prime brokerage could look to change their approach to servicing clients. 

As markets recover following the extreme volatility caused by the COVID-19 pandemic, hedge funds managing macro and credit have witnessed some of the biggest rebounds. 

According to alternatives data provider Preqin, hedge fund performance bounced back hard in the second quarter, delivering returns of 11.48% on average, with macro funds and long-short credit funds being among the most sought-after strategies by investors.

A potential asset class rotation, with a focus on credit and multi-asset strategies, could result in prime brokers revisiting their growth strategies with the aim to compete on product lines.

“We could see a big asset rotation coming, moving from equities to relative value fixed income and credit, and offering the necessary offsets and to provide custody and financing to clients who want to engage in those strategies. A lot of roles are being posted from those sectors for the prime’s risk team,” said Anthony Bennett, prime brokerage lead at consultancy firm Capco. 

The asset class rotation among hedge funds could encourage prime brokers to invest significantly in specialising in servicing credit and multi-asset strategies, as well as creating an infrastructure that can service the entire trade lifecycle.  

“We are seeing more demand for a multi-asset prime wrapper, and we have to ensure our infrastructure continues to be the best, our ability to service assets providing financing is correct, and that our cross-margin regimes are broad enough to adapt to the client strategies,” said Stephane Marchand, head of international prime finance and clearing sales, JP Morgan.