Goldman & Morgan Alumni Launch Eton Park, A Multi-Strategy Fund

A 1999 Article

His new team also includes Stuart Hendel, formerly of Morgan Stanley’s prime brokerage division, now Eton Park’s chief operating officer. In 1999, Mr. Hendel authored an analysis of the relationship between prime brokers and their hedge funds, for the Managed Funds Association periodical, the MFA Reporter.

He explained in the article that there are three reasons why hedge funds use multiple brokers for the execution of trades: anonymity, access to new issues and best-quality execution. A hedge fund using a single broker would lose anonymity because that broker would become familiar with its positions and strategies. Further, since executing brokers allocate their new issues among their best customers, hedge funds spread their commissions in order to partake of deals from several directions. Furthermore, some brokers may be better than others at executing different types of transaction, and a hedge fund will want to take advantage of the strengths of each. He also mentioned, although he put less stress on, another consideration: They spread around commissions in order to get the soft dollar services from each direction.

It is this need for multiple brokers that leads to a need for coordination and for a single prime broker, the article said. “If a fund were to clear all their trades at the brokers with which it executes, it would be extremely difficult to track and reconcile positions, corporate actions and performance. Furthermore, a hedge fund cannot fully benefit from scale on its margin financing or borrowing of stock unless it consolidates its balances at one broker. A prime broker enables a fund to execute all over the Street, while domiciling and financing its position at a single firm.”

With his own move from Morgan Stanley to Eton Park, Mr. Hendel will now have the opportunity to study that relationship from the other side of the table.

Contact Bob Keane with questions or comments at: [email protected].