Conflicts of Interest
between Prime Brokers
and Hedge Funds
Kate Wormald
Oesa Limited
Prime Brokers
Cash
trading
Capital
Introduction
Miscellaneous
Services
Repos
Prime
Broker
Futures
Administration
Direct
investment
Stock
loan
OTC
Custody
Clearing
Hedge Fund Structure
Investors
Feeder
Fund
Master
Fund
Feeder
Fund
Cayman
Manager
Investment
Manager
FSA registered
Relationship between Prime Broker and
Hedge Fund
Prime
Broker
Master
Fund
Cayman
Manager
Administrator
Investment
Manager
Reality Check
Prime Broker
Investment
Manager
Conflicts
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Capital Introduction – PB introduces Investors
to the Fund in return for what?
Direct Investment by PB or an affiliate
Provision of Start Up services ranging from Tax
advice, FSA applications, legal assistance, what
next?
Administration services
Trading services
So what are the potential Conflicts
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Investors – Introduced to Fund but relationship
is with the Investment Manager
Start Up services – Independence
Direct investment – conflict between
commissions on trading side and returns
PB documents protect PB charge assets how
does this fit in with above
Rights to sell at their discretion
Use of assets commingling
Compliance concerns
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Treating customers fairly - who is the customer
Investor or Investment manager
Money Laundering – who is responsible
Due Diligence – who is responsible
COMC/MAD – STR
Dealing Ahead Customer
Research and Conflicts and MAD disclosures
Legal Risk
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What if there is a problem with the Investment
Manager?
What if an Investor sues?
What if there is Money Laundering or COMC
or other regulatory investigations?
Conclusion
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Caution is needed in offering ever increasing
number of services
Chinese Walls
Different entities
New regulation?