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Hedge Funds and Introducing Brokers

An Introducing Broker (IB) is a registered Broker/dealer that has an agreement with a clearing firm to use that clearing firm's custody, clearing and/or other services to be the backbone of their securities business. IB's usually do not handle any money directly, as all client money is kept at the clearing firm in the name of the client. IB's have a wide range of purposes from financial planning and retail brokerage, to institutional options, futures, or fixed income trading and research.

In the prime brokerage world, the IB may be a small boutique firm that offers its clients many of the benefits of the clearing firm, including custody of all assets, at a rate that is often less than a small to medium-sized hedge fund will get directly from the clearing firm. The IB is able to do this because it may service 50-100 hedge funds and from the clearing firm's point of view, the IB is one account to service. The IB essentially acts as an aggregator of small to mid-sized funds. The IB is able to pass through a portion of the savings generated by the combined trading of all of its customers.

Smaller funds typically do not have the negotiating power to get the best rates possible from the large “assembly line” type of prime brokerage firms that are still willing to accept smaller funds. These bulge bracket brokers usually provide limited service due to the fact that they service hundreds or thousands of funds. For the clearing firms, the IB that provides prime brokerage should provide good incremental revenue and may also be a source of new business because it can act as an “incubator” for smaller funds. As funds get large enough, they may choose to go direct to the clearing firm if the clearing firm offers them some other service, such as a greater level of capital introduction.

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Last updated 2938 days ago by Capital Management Services Group