A robust open-architecture platform is critical – but large prime brokers often expect their customers to be technologically self-sufficient, say Clear Street’s Andy Volz and Jud Howson

[blog image] Clear Street, Andy Volz and Jud Howson


Emerging hedge fund managers – those with under $500mn in AUM – are on the rise. Between 2019 and 2024, the number of emerging managers grew by 11% to 2,969, with almost two-thirds based in North America. Today, emerging managers comprise about 30% of the overall hedge funds universe.

Investors look to emerging managers for diversification and outperformance. Between March 2020 and February 2025 emerging fund managers delivered a five-year annualized return of 16.23%, compared with an 8.53% return from their larger, more established peers, Preqin data shows.

Another factor underpinning the growth in emerging hedge funds is their competitive fees. Among managers pursuing equity strategies for example, the average management fee charged by small managers is 1.27% versus 1.51% for the largest managers. Meanwhile, the average performance fee charged by small managers is 17.13% versus 18.35% among the largest managers, according to Preqin data.

But today’s market conditions and investor expectations pose challenges for emerging managers, who operate with lean resources. In addition to navigating increasing volatility, these managers face more complicated reporting requirements than they have in the past. Investors now expect sophisticated analytics, including detailed portfolio exposures, factor correlations, and attribution analysis, regardless of a fund’s size or stage. The proliferation of vehicles to facilitate investment, such as separately managed accounts and first loss platforms, have added complexity when it comes to allocation as well as data aggregation. As funds look to grow and scale, these pressures become more pronounced.


Scalable technology is essential to growth

For many emerging managers, infrastructure planning often takes a backseat to performance and fundraising. Operational readiness can feel like a secondary problem to be solved later, once growth materializes. Technology then becomes a chicken or egg problem; until managers have secured sufficient capital, they can’t afford the infrastructure they need to attract more investors. And yet, they often can’t grow their investor base without scalable technology.

As such, overlooking the importance of scalable technology can be a costly mistake. It isn’t just growth in AUM and trade volumes that drives complexity for emerging managers, but expansion into new products, regions, and vehicles. Each step introduces new operational demands and challenges, including multi-currency reporting, daily customized reporting, and real-time aggregation across counterparties. For small funds that often rely on a combination of fragmented systems and manual spreadsheets, investing in new infrastructure may seem prohibitive – but putting plans in place from early on and assembling the right stable of partners can alleviate these growing pains before they arise.


How the right prime broker can help

Emerging managers looking to plug technology gaps often find that large prime brokers expect their customers to be self-sufficient. No matter the size of their fund, when working with established prime brokers, managers must independently ingest start-of-day files, distribute end-of-day files, and integrate data across multiple order, execution. and portfolio management systems.

That’s why emerging managers need a prime broker partner who understands their unique requirements and can help them integrate scalable technology into their daily operations. The right prime broker partner can offer managers access to a robust, open architecture platform that eliminates time-consuming manual reconciliations; automates critical workflows; and ensures accurate, real-time visibility of key metrics, such as investment exposures, P&L analytics, and margin requirements. Further, this class of technology is both horizontally and vertically scalable, offering managers a path to expand their technological footprint without costly upgrades or the need to convert entire technology stacks as their strategies evolve.

Beyond operational support, the right prime broker can assist with the services emerging funds need to grow their business. This includes targeted capital introductions to help managers connect with suitable asset allocators, corporate access to unique issuers presenting differentiated investment opportunities, and equity research to support managers’ in-house teams.

The right prime broker partner should also be able to help with critical functions where missteps can be costly, such as treasury management, risk oversight, and liquidity management. With an expert, collaborative partner shouldering these complexities, managers are freed up to stay focused on their core strengths – managing risk and generating the alpha their investors expect.


Prime broker checklist for emerging managers

When evaluating potential prime brokers, emerging managers should keep a few key considerations and questions in mind, including:

  • Does the prime broker offer a scalable and integrated technology platform?

  • Is the platform truly open-architecture and easy to integrate with existing (and potential future) systems?

  • What level of operational support can we expect?

  • Does the prime broker’s overarching platform support related activities, such as fundraising and business development needs?

  • Does the prime broker provide risk and treasury support tailored to small teams?


About
Andy Volz serves as Chief Commercial Officer at Clear Street. He oversees Clear Street’s sales and distribution activities, as well as new business initiatives across the organization. Andy joined the firm with almost 15 years of financial services industry experience. He was COO of Jones Trading and Head of Product in Prime Services Sales at Wells Fargo following the company’s acquisition of Merlin Securities.

Jud Howson is Head of Institutional Product at Clear Street, leading development of Clear Street Studio®, the firm’s proprietary prime brokerage, risk, and trading platform. With 20 years of experience in capital markets, Jud joined Clear Street from Wells Fargo Securities, where he served as Managing Director following the firm’s acquisition of Merlin Securities.


This article originally appeared in Hedge Funds Q1 2025: Preqin Quarterly Update.


This is a sponsored opinion by Clear Street. The views expressed are provided as of May 6, 2025, do not constitute an endorsement, recommendation, or any other advice, and are subject to change. The following content does not necessarily reflect the views of BlackRock, Preqin, or any of its affiliates. Clear Street is not affiliated with Preqin. Preqin received compensation from Clear Street in exchange for publishing this content.