Pressure on prime broker funding model threatens to drive up financing costs for hedge funds

Faced with mounting regulatory pressures and changing market practices, prime brokers may have to increase financing rates and scale down the amount of leverage they provide to hedge funds.

The days of hedge funds turbo-charging their returns with vast amounts of cheap leverage provided by prime brokers may be gone forever.

Tougher bank regulations and changing market practices are driving up prime brokers’ operating costs, which will eventually have to be passed on to clients. The scarcity of bank capital also calls into question prime brokers’ capacity to meet the demand for leverage in the long run as hedge fund assets grow and risk appetite returns.

The major prime brokers will