As a Tier 1 broker, our capital introductions build long-term partnerships for investors and funds based on trust and transparency.
Which is more difficult finding capital to invest or finding funds to invest your capital?
The answer likely depends on your perspective. It reminds me of the whole chicken or the egg question that has plagued mankind for ages.
In a world where information and connection sit at our fingertips, it is ironically tricky for essential business connections to occur. Everything from legal hurdles to finding the right fit makes the process all that more challenging.
Capital introductions have been around for as long as banking despite the fact that JP Morgan claims they ‘invented’ the concept back in 1997.
What are capital introductions?
Retail investors never get exposed to the world of capital introductions. The lucky ones get access to wealth managers. Otherwise, they’re relegated to standard software that gives them high-level ideas for investing.
Institutional money garners a lot more respect. Everything from pension funds to high net worth individuals needs something more than prepackaged investment strategies. They seek diversification and performance at a much higher level. Clients could be looking to broaden their investments outside of local equities into foreign exchange to reduce portfolio volatility. The irony is the very funds that need their services often can’t directly market to them.
In most cases, some rules and regulations prevent hedge funds and traders from directly marketing to investors. Instead, they use prime brokers as the middleman to find them capital.
How it works
Hedge funds and traders seeking capital will solicit the services of prime brokers to bring them together with potential investors. This isn’t something that they do from the outset. Traders and funds need to be able to prove they merit consideration.
First and foremost, funds need to be able to prove their metal. They need to demonstrate their ability to generate consistent returns, minimize drawdowns where possible, and effectively manage capital through various market conditions. The longer a fund has shown their ability to perform, the more they will entice potential investors.
Alongside performance, reputation is a crucial element to any relationship. Funds should be able to provide clients with timely, accurate reporting. Their investing philosophy, risk controls, and structure must be transparent to the investors.
Lastly, they need a good relationship with the introducing entity. It takes a lot of time, effort, and risk to introduce investors to funds. So, they must trust the funds to uphold their reputation and standards.
The Principal-Agent Problem
Many prime brokers have a principal-agent problem with their structure. This problem occurs when the broker has an incentive and acts in their own best interests instead of their clients, also known as a moral hazard.
Many Forex Brokers create a systemic problem with their B-Book structure. Operating their own hedges against their clients immediately puts them at odds with the customers’ best interests.
Now, it’s not unusual for prime brokers to do capital introductions to get funds to transact with that broker. That’s both a healthy and appropriate arrangement that uses a compensation structure that emphasizes the right elements.
However, some prime brokers will also take compensation as part of the introduction. Depending on the way this occurs, it can often drive behavior that’s not in the investors’ best interests.
Scandinavian Capital Markets’ Approach
With so many paths to do things the ‘wrong way’, Scandinavian Capital Markets chose a different path. Rather than create complex structures that assess fees in various areas, we believe that relationships built on trust and transparency are infinitely more profitable.
We accomplish this through a few key areas.
First, we operate as one of the few A-Book Tier 1 Brokers. Our fees remain straightforward, giving our clients a transparent partner to work with. We don’t operate against our traders or funds because we want that obstacle to long-term relationships removed. Working with clients over the years and decades requires trust. It’s difficult, if not impossible, for that to happen when you know the broker you’re working with is incentivized against you.
Second, we create capital introductions without compensation on the front-end. Again, our goal is to align all our fees to work for the customer, not against them. Removing these impediments allows us the freedom to delve into our client’s needs and focus on finding them the most strategic partnership rather than the easiest.
Third, the traders and funds we work with are of the highest calibre and reputation. We ensure that capital introductions provide our clients with partners that deliver performance that matches their goals. We don’t just want the business for the sake of acquiring transactions. We want investors who trust their funds and funds that grow with us.
Experience The Difference
It’s easy to say that we do things differently. That’s why we want you to see what it’s all about. As the co-founder of Scandinavian Capital Markets, I invite you to meet our team and learn about how we do things differently.