When some big hedge funds and prime brokers started to implode last year, many thought the prime brokerage industry would never be the same. But, as IDD notes, the prime brokerage industry is alive and well, albeit in transition, in the wake of the credit crunch. 

Many have been forced to adjust their target markets and deliver higher-value services. Some are now focusing on large funds only, and others just on medium-sized firms. Some are providing more advice on everything from fees to redemption policies. All this is taking place amid a steep contraction in leverage--in many ways the bread and butter of prime brokerages, traditionally. We'll see if leverage once again kicks up as the industry recovers, or if new rules make that impossible.    

In any case, we're seeing some interesting responses from the field. Morgan Stanley, traditionally a major player along with Goldman Sachs, is scaling back. According to Bloomberg, the bank made the decision back in November. That spells opportunity for others. Citigroup has been adding staff to its global prime-brokerage group. Bank of America Merrill Lynch also has plans to expand. Meanwhile, JPMorgan and Credit Suisse are also seen as well-positioned to gain market share. 

In addition, small banks sense an opportunity. Confier Securities, for example, bought Morgan Stanley's outsourced-trading business in April and has been adding staff from Morgan Stanley and Citigroup. Most recently it hired a prime brokerage executive from UBS. 

But in general, you have to wonder if there will be enough assets to go around. Hedge fund Assets fell to about $1.3 trillion at the end of March from $1.9 trillion at the end of 2007, according to Hedge Fund Research. That will hurt the prime brokerage operations of just about all of them in the short term. 

But the future is the focus. The hedge fund industry will revive, and you want to be well placed to rise with it. The bar is much higher. Accenture notes the new requirements are more stringent in terms of core service offerings and efficiency. - Jim