Credit Suisse Hedge Fund Exit Cedes Ground to Wall Street Rivals
(Bloomberg) -- Credit Suisse Group AG was one of the few international banks still trying to compete with the biggest Wall Street firms in the lucrative business of serving hedge funds. Now it’s one more that’s thrown in the towel.
The Zurich-based bank was the biggest European player in the prime-brokerage industry until a series of risk-management failings led to a $5.5 billion loss on trades with Archegos Capital Management and prompted a strategic overhaul. The firm said Thursday it will largely exit the business, which lends cash and securities to hedge funds, and U.S. banks are poised to pick up the pieces.
Goldman Sachs Group Inc., Morgan Stanley, and JPMorgan Chase & Co. already loom large over the prime-brokerage industry, which generated some $15 billion of revenue in 2020 and is thriving this year as investors pour record amounts into hedge funds. And other U.S. banks are looking to grab share and could benefit from one less rival.
“Credit Suisse’s pullback will help feed the global equities ambitions of banks like Bank of America and Citigroup, which have been investing in their units and aiming to build market share,” said Alison Williams, a senior analyst at Bloomberg Intelligence.
Prime-brokerage divisions are vaunted within investment banks, both for generating profits and cultivating relationships with wealthy hedge-fund managers. They typically produce about one-third of equities-trading revenue across Wall Street, according to data from research firm Coalition Greenwich. Still, the businesses require significant capital as a buffer against potential lending losses and investments in technology.
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The Archegos debacle laid bare the risks of competing for market share in an industry dominated by a small group of U.S. banks. Credit Suisse enabled Bill Hwang’s family office to make stock bets with leverage -- or borrowed funds -- of up to ten times, exposing the lender to losses far exceeding its peers when the firm collapsed, Bloomberg has reported.
Credit Suisse had already chopped its balance sheet in prime brokerage by more than one-third in the second quarter in a pullback from risk. And rivals had noted a pickup in share, including UBS Group AG, which said it did more prime brokerage business in the third quarter without adding risk capital to its investment bank.
Prime brokerage contributed to a 35% surge in third-quarter equities trading revenue for the biggest U.S. banks, adding to the Americans’ prowess in the industry. Goldman Sachs said it had record client balances in the prime business, while JPMorgan and Citigroup also cited hedge-fund activity. Even Morgan Stanley, which lost $1 billion on Archegos trades, noted an increase from the business.
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