April 19, 2010
Partner Timothy R. Lavender was quoted in a Hedge Fund Law Report article, “What is Synthetic Prime Brokerage and How Can Hedge Fund Managers Use It to Obtain Leverage?”
The article discussed synthetic prime brokerage as a strategy that hedge funds use to obtain leverage through the use of over the-counter derivatives, particularly including total return swaps. The article summarized benefits and potential downsides of synthetic prime brokerages to hedge funds, as well as U.S. legislative and regulatory action that may inhibit its growth.
The article quoted Mr. Lavender on the benefits of synthetic prime brokerage to hedge funds, including ease of establishment and use. He explained that most hedge fund managers have a relationship with one or two prime brokers that offer the best margins, systematic reporting and other benefits. “However,” said Mr. Lavender, “due to government regulatory action, it can take three
to four weeks to perform the due diligence required to set up a prime broker relationship. Because a synthetic prime brokerage is merely a contractual relationship relating to a basket or portfolio of securities, not as much due diligence is required as if the manager were establishing a prime broker relationship.”