2021: A Surprising Year for Prime Brokerage

2021 should have invigorated prime brokerage as active strategies continued to outperform and hedge funds saw record assets under management (AUM). Instead, 2021 turned out to be a watershed for the sector in a number of surprising ways.

Below are five key themes that defined 2021 and will continue to impact prime in the new year:

1. Increased Demand Side for Prime Solutions

In 2021, episodic volatility has drawn more attention to actively traded strategies. Moreover, positioning for macro strategies like rising rates (for instance, natural gas +93% YoY) and growing inflation expectations (labor market tightness — weekly unemployment claims in October tumbled to a ½ century low) have many institutional investors rethinking investment strategies and increasing their hedge fund allocations. That’s on the back of the best year for hedge funds in a decade in 2020, outperformance in 2021, and reaching an all time high AUM of nearly $4 trillion at mid-year. Ever more sophisticated strategies are emerging that require active management and demand additional risk capital and more nuanced attention. Many primes either don’t want to take on this new risk or cannot increase balance sheet utilization, creating situations where primes and brokers simply stop clients’ access to certain securities. Meeting the demands of sophisticated traders is becoming harder, but interfering with the proper function of markets should not be the answer.

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www.clearstreet.io/insights/2021-a-surprising-year-for-prime-brokerage