Cantor Fitzgerald
Sean Capstick, head of prime brokerage for Europe, the Middle East and Africa at Cantor Fitzgerald, speaks about the financial services provider’s growth in Europe, market trends and the role of technology in today’s market
Cantor Fitzgerald has significantly grown its European team recently. What’s driven those hires and would you say you are in prime growth mode?
We are very much in growth mode. We have added a number of new hires in equity finance, origination and client service in our European business. We will be selectively adding more. These are in addition to senior hires we are adding across our broader client-facing equity franchise, where we have also added a new head of European equities and a number of senior sales trading and trading hires in the past few months.
We believe there is a significant opportunity for a nimble prime broker to partner with mid-sized hedge funds that today the ‘bulge bracket’, meaning more traditional primes, ignore. In the few years since we launched our CF Secured prime brokerage (PB) business we have seen tremendous revenue growth and now service in excess of 100 clients.
Our business today is primarily in the US but our footprint in Europe is expanding rapidly and we see huge opportunity here. We believe the mid-sized European hedge fund is very under-serviced and the combination of service, pedigree and balance sheet we offer positions us very well.
How is your balance sheet positioned for future growth in the market?
Cantor Fitzgerald has a long history in the investment banking industry dating back to 1945. Our balance sheet has grown since then, along with our client footprint and offering. In PB specifically, our CF Secured entity has built a substantial balance sheet to support our rapidly growing clients franchise.
How would you describe the European PB scene in contrast to other markets?
The hedge fund industry continues to be in decent health. After a tough 2018, where the average fund lost 4.1 percent in performance, things have picked up in 2019 so far, with the Global Hedge Fund Index up by 4.6 percent as of the end of July, according to HFRX.
Industry assets, in contrast to what much of the press would have you believe, are still at near record highs at over $3.2 billion. European-based managers have participated in this, and have also had their own source of growth with the flow of assets that have gone into UCITS strategies over the past few years.
Clearly though there are a number of issues affecting Europe, most obviously Brexit, and EU growth expectations, and these do present challenges (and opportunities) to allocators looking at the region.
In light of the recent troubles Deutsche Bank is facing in the PB space, do you see opportunities in the European market?
This year will go down as a watershed year for the PB industry. The retreat we are seeing from a number of European banks across the equity space is a major event and changes the complexion of the industry in a big way. We believe there is a large opportunity for Cantor Fitzgerald, with its US heritage, but local presence, to become an alternative provider of choice relative to the traditional bulge bracket providers.
We have invested in our client service, technology and capital introduction, among other areas, and believe these position us well to partner with many mid-sized fast growing funds.
How is technology assisting you to better understand your clients?
Technology is at the core of what we do and of the product we deliver. We have a dedicated prime brokerage technology team in New York and London, supported by an extensive team of developers in India who are constantly ensuring our reporting tools are state of the art, not encumbered by a lot of legacy systems.
Are the low interest rates globally affecting the industry? If so, how and what can be done to mitigate against it or capture any opportunities?
What feeds the hedge fund industry and ensures its ongoing success is performance. The low interest rate environment since the global financial crisis has clearly been a boon to developed markets in particular and a tail wind to hedge fund performance. Many hedge funds benefitted from their long books and market exposure.
Equally, many prime brokerage books were long-biased, and shorts were more scarce. As the interest rate environment has changed we should now expect managers to make more use of the short side of their balance sheets, which in turn should be a decent revenue source for the stock lending desks. In the recent survey we received very strong reviews for our stock lending capabilities from clients, and we have invested extensively in this area as we believe we should be a big beneficiary if short volumes pick up.
What other trends are you noticing in Europe?
The defining phenomenon in the European alternatives space for the past five years has been the trend towards asset growth in UCITS strategies. Again, as mentioned above, with negative performance in 2018, this trend slowed.
However, the long-term structural interest in European allocators preferring this structure has not gone away. Working with clients via the International Swaps and Derivatives Association in synthetic instruments continues therefore to be an ongoing trend and swap balances are growing at the prime brokers.
With the bulk of the European hedge funds run from London the main issue most allocators are watching is Brexit and which way it will break.
Managers comment that the rate of fund flows has slowed as people take a wait and see approach to the Brexit story. A resolution here will help lift this cloud and hopefully be a reason for allocators to once again add to their European fund holdings and make fresh allocations.
