Consolidation in the Forex Prime Brokerage (FX PB) industry is increasingly evident, especially in hedge funds。Commissioned by Standard Chartered, Acuiti has released a new report highlighting fund managers' concerns about the ongoing adverse effects on the sector.。

The study, based on interviews with 57 hedge fund operations executives, shows that nearly 40% of hedge funds have reduced their FX PB partnerships over the past three years, often because vendors have withdrawn from the market.。

Forex PB Providers Dwindling

The report shows that hedge funds are increasingly concerned about the dwindling number of FX PB providers, most often due to internal consolidation decisions.。However, a third of companies that reduced their FX PB providers were forced out because their existing brokers withdrew from the market, while 24% were forced out.。

Firms that have been shut out or whose providers have left the market are reported to face multiple challenges, including reduced access to liquidity, costs associated with opening new brokers, and increased operational and settlement risks.。Notably, more than a third of these companies lack contingency plans, further exacerbating their concerns.。

Ross Lancaster, head of research at Acuiti, commented: "Hedge funds are highly dependent on their FX PB providers, so the level of concern across the market is high.。"

In addition, the industry's risk profile has come under scrutiny following several high-profile losses such as the collapse of Archegos Capital Management。These events led to an increase in minimum monthly commissions and the elimination of smaller companies with lower trading volumes, resulting in a two-tier market。

Lancaster added: "Sellers have the opportunity to expand to meet the needs of hedge funds, both to gain access to unique trading opportunities in emerging and frontier markets, and to reduce the operational risk associated with reliance on specific suppliers.。"

Satisfaction varies by company size

In addition, the study found that smaller hedge funds, especially those with less than $1 billion in assets under management (AUM), face the risk of limited supplier selection.。

Hedge funds' satisfaction with the number of existing FX PB providers varies widely depending on the size of their assets under management。About 43% of companies with less than $1 billion in assets under management said they were dissatisfied, compared with only 12% and 8% of companies with more than $5 billion in assets under management.。As a result, small hedge funds are increasingly dissatisfied with their limited options。

In 2023, there is really little talk of new FX institutions entering the market, replaced by acquisitions of existing companies。In September, for example, Marex announced the acquisition of Cowen's prime brokerage business.。However, the cryptocurrency market offers opportunities for the development of the industry, and investors are constantly looking for greater trust.。

Impact and future outlook

More than half of the companies surveyed expressed considerable concern about the possibility of their FX depositary securities suppliers exiting the market, with 16% expressing great concern。Andy Ross, Global Head of Main Boards and Financing at Standard Chartered, noted that hedge funds are facing increasing challenges in finding reliable forex main board suppliers, especially as they seek to expand their currency trading strategies.。

As a result, as the market continues to evolve, hedge funds must become increasingly strategic in selecting FX PB providers, especially in an integrated market that poses operational and liquidity risks。

"At the same time, as the global market continues to grow, hedge funds from around the world are looking for partners who can offer a wide range of currencies to optimize their trading strategies," Ross concluded.。

The study refers to a survey of 57 hedge funds with participants from different regions, including North America (19%), the European Union (24%), the United Kingdom (29%), Asia (22%) and the rest of the world (6%).。The assets under management of these funds ranged from $0-100 million (11%), 1.$01-500 million (16%), 5.$1-1 billion (14%), $1-5 billion (23%) to more than $5 billion (37%)。