Hedge funds are the fastest-growing sector of the asset management business. Between 1991 and 2003, global hedge fund assets grew by more than 700% to almost USD 800 billion. This impressive performance looks set to continue, with assets estimated to reach USD 1 trillion by 2005, according to leading industry data provider TASS Tremont.
Thanks to the trading volumes they generate, hedge funds have emerged in recent years as one of the most important client sectors for investment banks. Investment Banking & Securities already derives a substantial portion of its client revenues from hedge fund clients and we expect this contribution to rise as we pursue our goal of increasing hedge fund-related business.
One area of particular focus for UBS is prime brokerage. Prime brokerage is a single area for a bundle of services that investment banks offer to hedge funds. Historically based on services such as securities lending, provision of leverage, custody of positions and trade settlement, prime brokerage has evolved into a broader business which supports hedge funds in nearly all their activities.
With the development of this business model, prime brokerage-derived revenues have become increasingly important. Anecdotal evidence suggests that prime brokerage now accounts for more than half of the equities division revenue of several leading investment banks. UBS aims to become one of the top three global providers of such services.
A clear signal of our ambitions was the acquisition of ABN AMRO’s US prime brokerage operation in late 2003. The acquired business concentrates mainly on small to medium-sized hedge funds and has reinforced our credibility in the US start-up hedge fund market, where ABN AMRO was a clear market leader. By contrast, the needs of more mature funds are broadly similar to those of other large financial institutions, a sector in which UBS is already well established. The acquisition will help us tailor our offering to the full life-cycle of hedge fund clients.
Recognizing the volatile nature of the hedge fund industry, UBS has also put in place a dedicated risk management unit with a mandate to monitor the investment strategies of client firms and to ensure that adequate collateral is held against credit exposure.
UBS’s growing experience of the hedge fund sector can be leveraged across the firm. A case in point is an initiative to provide UBS’s private investor clients with an attractive range of alternative investments. In this venture, the Investment Bank will act as an advisor to the firm’s wealth management businesses.
Through its prime brokerage business, UBS becomes a business partner to the emerging entrepreneurs of the hedge fund world. Some of today’s hedge fund start-ups will develop into multi-billion dollar global asset management businesses, and will rank among UBS’s largest clients in years to come.
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