Prime brokers and fund administrators including JPMorgan and State Street are working to capture this business. Merrill Lynch threw its hat into the ring this week by launching the Merrill Middle Office Solution, a packaging of technology and services from GlobeOp that is specifically intended for hedge funds that work with multiple prime brokers. "The service model for the classic prime broker becomes somewhat diluted when you move into a multi-prime environment," says Peter Donovan, managing director of the business consulting group of Merrill Lynch prime brokerage. "The fund is forced to make a decision: do I rely on my lead prime broker for aggregation of all my middle and back office needs, do I build that capability in-house, thereby lessening the dependency that I have on prime brokers, or do I outsource to third parties a portion or all of the middle office functions? To date, we and very few others have addressed this need."

Echoes David Newman, director of the business consulting group of Merrill Lynch prime brokerage, "Many hedge funds don't have the economies of scale to be able to support both the multiplicity of products they deal with and multiple prime brokers."

The core Merrill Middle product is a data consolidation engine with overnight reconciliation of all cash and security positions to multiple prime brokers and fund administrators. A centralized data master generates reports required by the hedge fund manager, including risk management reporting, performance measurement and attribution analytics. Hedge funds trading over-the-counter derivatives are supported with trade capture, valuation, collateral management and settlement service.

Can Merrill Lynch, a prime broker to several hundred hedge funds, truly offer a broker-neutral solution? Donovan says it can because it's not supplying the services directly but through GlobeOp and the client's positions don't reside with Merrill Lynch. Why not use GlobeOp directly? Newman says Merrill has carved out a unique bundle of services that GlobeOp will not be offering in any way but through Merrill.

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