Deutsche Bank Courts New York Hedge Funds After Cuts
(Bloomberg) -- Deutsche Bank AG’s hedge fund clients have had a front-row view of tumult this year, as the lender’s new leader unveiled another strategy, dramatically shrinking its U.S. prime brokerage.
Now, the firm is trying to reassure some of its most important customers in New York -- those it wants to keep -- that it’s ready to handle their business.
Germany’s largest bank invited a select group of hedge fund managers and other institutional investors to meet and mingle with at least a half dozen of its most senior executives, including Chief Financial Officer James von Moltke, at the Lotte New York Palace Hotel in Manhattan late Thursday afternoon, according to people with knowledge of the plan.
Into the evening, attendees strode past a seven-tiered showcase of gold-covered Moët & Chandon champagne bottles as they entered and left the private conference room. A company spokeswoman declined to comment.
While it’s not uncommon for big investment banks to periodically hold high-level meetings with lucrative clientele, Deutsche Bank is under unusual pressure to defend its business. Executives hoped to bolster personal relationships with money managers at the event, following a broad leadership shakeup at the U.S. unit over the summer, the people said before the gathering. The session also was meant to serve as a briefing on the financial resources the bank can commit to their funds.
An invitation viewed by Bloomberg said the meeting would offer “insight into DB’s current credit-risk profile, CCAR results, and other topics relevant to our counterparties.” The acronym refers to the Federal Reserve’s stress tests, which Deutsche Bank failed this year as the regulator faulted the firm’s internal controls.
The bank picked an opportune moment to talk. Early last month, as Moody’s Investors Service lifted the firm’s issuer rating by two notches to A3. Many hedge funds use those grades to calculate how much assets they demand as a safety cushion from their counterparty. The lender’s prime finance unit has seen collateral worth billions of dollars flow back to the bank as a result, two people said.
Read more: Deutsche Bank expects record balances as hedge funds return
Since taking over in April, Chief Executive Officer Christian Sewing has trimmed prime-brokerage staff and the balance-sheet resources allocated to support U.S. transactions -- part of a broader emphasis on maintaining the bank’s strength in its home European market. The firm severed ties with some hedge funds whose dealings generated too little revenue. Competing lenders have been hoping those moves might provide them an opportunity to pry away some of Deutsche Bank’s most valuable customers.
“Probably DB had too many clients,” said Davide Serra, founder of Algebris Investments, who invests in financial services companies and relies mainly on other prime brokers. “If I were DB, I would say, ‘Who are my key clients? Where are my relationships that are profitable, and a win-win for both the client and myself?’”
One person with knowledge of Thursday’s meeting said some executives intended to make a pitch: If funds seek to diversify prime-brokerage relationships, they should still look to Deutsche Bank to be their main European bank.
The firm has encouraged a number of hedge funds to move business to its German legal entity and counterparty, and away from the U.S. broker-dealer, three people said. The change helps Deutsche Bank finance its operations more efficiently, one person said.
Many large funds don’t mind the shift, especially those with a significant presence in Europe. However, some have complained about the paperwork and are more comfortable with an entity that complies with the same legal and accounting standards as in their home country, one of the people said. At least one client had a lawyer assess whether doing deals under the European legal system poses any additional risks, one person said. A few have walked away from Deutsche Bank, two people said.
People briefed on Thursday’s meeting declined to identify any hedge funds invited, and the dark-suited attendees came and went discreetly. The bank’s major clients include Renaissance Technologies, Och-Ziff Capital Management Group LLC and AQR Capital Management.
The invitation listed bank executives including Americas CEO Tom Patrick, fixed-income trading head John Pipilis, U.S. broker-dealer chief Zia Huque, and Peter Selman, the Goldman Sachs Group Inc. veteran who was hired last year to revive stock trading.
Sewing has toured the world since unveiling his strategy just weeks after taking the helm. During stops at hubs such as New York, Singapore, Hong Kong and London he’s told staff and clients alike that the lender is still committed to its local presence.
Von Moltke indicated on a conference call with analysts in late July that the bank cut 40 billion euros ($46 billion) of leverage exposure in its prime-brokerage unit in the second quarter. Unit revenue in the period was essentially flat even with the balance-sheet reduction, partly because of higher margins, the bank said in July. As a result, the bank does not expect the cuts to its prime brokerage unit to result in lower revenue going forward, Sewing said on the quarterly analyst call in July.
Deutsche Bank has raised prices to a more-normal market level after offering discounts to hedge funds last year in a bid to win back balances lost during a 2016 confidence crisis, one person said.
“Deutsche Bank historically has been used as cheap leverage,” Serra said. “It was not clear that Deutsche Bank shareholders got anything back out of it.”
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