With an eye toward reducing counterparty risk for smaller hedge funds, Direct Access Partners LLC, an institutional agency broker, has rolled out Global Prime Services to strengthen its multi-prime brokerage offering. At the same time, it partnered with Paladyne Systems for order management, data aggregation and risk analysis and reporting.

While DAP already had a multi-prime brokerage platform, it recently added Goldman Sachs Execution and Clearing to join Bank of America/Merrill Lynch and Bank of New York Mellon/Pershing as best-of-breed custodians.

"We come in as an introducing broker and we become the single point of contact with the hedge fund for both trading, technology and operations," explained Mark Salameh, DAP's director, sales and marketing Global Prime Services, Global Prime Services in New York, in an interview with Wall Street & Technology.

In many cases the hedge fund has a single-prime broker at one custodian and wants to add a second custodian to reduce counterparty risk, says Salameh, who built the platform and continues to lead the operations. In addition, there are hedge funds in the $100-to-$250 million range that have a single prime broker and are hitting the wall, said Salameh. Investors are making inquiries to hedge funds about their infrastructure when they fill out their due diligence questionnaire and the hedge funds realize they need to shore up their operations, he continued. On top of that, over the past 18 months, a lot of hedge fund managers that were single prime, are scrambling to add a second prime broker and dealing with the headaches of the operations and back-office support.

"Typically they'll have a single custodian and then they will either switch custodians and go multi-prime or add another custodian onto their platforms," related Salameh.Unless they are multi-billion dollar hedge funds, they don't have the operational staff in place, said Salameh. That's where Direct Access Partners comes into play to offer the trading, and reduce the costs, said Salameh.

The so-called mini-prime brokerage trend has taken off to address the needs of smaller hedge funds seeking to reduce counterparty risk. According to sources, some of the larger prime brokers have pushed out the smaller hedge funds because their accounts were not lucrative. However, the larger prime brokers get the business through this aggregated prime services model from the smaller firms. That trend is driving the business, according to the source, who noted that the new hedge fund launches are in the $30 million to $40 million range, as opposed to half a billion in the past, which means they are less attractive to the bigger primes.

"The industry is seeing a spike in new launches in the last three months," noted Salameh. "What we really built here is an institutional ready platform," said Salameh, who adds that his firm built the platform from the investor's perspective, so that the hedge funds could monitor their institutional assets.

The new Global Prime Services offering is providing access to numerous direct-market access (DMA) platforms as well as Paladyne's order management technology and data aggregation to consolidate data coming from single or multiple prime custodians as well as risk reporting and risk analysis.

"Paladyne is playing an integral part in the multi-prime solution. "It's the concept of simplifying complexity to the hedge fund and aggregating data when you are multi-prime and have multiple data reports from the custodians," said Salameh.

According to Sameer Shalaby, CEO of Paladyne Systems, an infrastructure provider to hedge funds, "The idea is to originate the trades in Paladyne, stage it in the market through broker-neutral systems, and as you are getting fills back you are able to receive a real-time P&L, allocations and position-keeping system. You aggregate that from the different counterparties and you can produce an aggregated view of the positions they're trading with the different brokers and produce all the reports," said Shalaby. Over the past few years, Paladyne has proven this model with Credit Suisse to provide to its hedge fund clients, so the integration effort with Direct Access Partners was smooth, noted Shalaby.

Paladyne has a relationship with RiskMetrics and through that is able to offer Risk Metrics reports to the Direct Access clients, noted Shalaby. "This becomes a compelling solution for the hedge funds that can operate and deal with the full trade lifecycle, from order generation to allocations to risk reporting, which would be key for investors," emphasized Shalaby. Investors are requiring that hedge funds provide performance reports and exposure reports, so RiskMetrics comes into the equation there, he said. Compliance is also a requirement that has emerged for hedge funds over the past 18 months, said Shalaby, whose firm provides pre-trade and post-trade compliance. "That is a trend," says Shalaby, noting the compliance rules monitor restricted lists and sector concentrations.

"We've taken the extra step by creating transparency through the RiskMetrics reporting which is well known name with investors and it strikes a chord with them," says DAP's Salameh.

Clients will be able to utilize a diverse service offering that includes multi-asset execution in over 100 markets, independent research, securities lending and business consulting according to the release.

While it owns a floor brokerage on the NYSE, DAP offers multi-asset execution services in equities, international equities, fixed income and options, while futures is going live in the second quarter of 2010.