Paul Kelly is the Chief Executive Officer of Linear Investments, a prime brokerage and discretionary fund manager headquartered in London. Hedge Funds Club’s Stefan Nilsson had a chat with Paul about Linear and the current state of the prime brokerage industry.
Linear will shortly turn 10 years old. Earlier in your career, you worked for several fintech firms as well as in wholesale execution services at Citi. What made you leave that behind to launch Linear?
I have always had an entrepreneurial spirit and growing a business using my own clearly defined vision was always on the agenda for me. The experience I got in my early career, not just from specific roles, but also from the people I worked with and that mentored me, helped set me on the path I am still on today. What drives great business isn’t just finding the gap in the market, although of course there is great value in that, it’s building the team and culture within your own business so that you can benefit from every opportunity. Leading from the front and showing that building a business is possible has meant I have been lucky to work with some excellent people along the way and am still privileged to do so now.
How has Linear’s prime brokerage evolved so far?
Linear found its place in the market early on. That wasn’t by chance. It was down to strategic thinking and operational initiatives that were designed to grow a solid client base. In our early days, we set up a hedge fund hotel, a fund incubator designed for start-ups to support their early days including office space, a regulatory umbrella and access to our PB services. There has always been less opportunity for new funds trying to start out from scratch and also funds that are in a growth period, as the larger PBs tend to not support smaller firms due to the level of business they are able to transact. We have always provided that platform to small firms and have evolved to support mid-sized firms as well as moving from pure PB to custody and execution as that is what our market demands.
Prime brokerage is facing some major changes with Credit Suisse being the latest large firm shutting down its prime brokerage division following multi-billion-dollar losses. What do such changes mean for specialist prime brokers like Linear?
I see these changes in the market as an opportunity, not a concern. We identified the challenges in the PB market some time ago and foresaw that there would be some casualties at some of the larger banks. Linear’s service is lean, and we have always had a strong focus on keeping costs down. We have always managed risk carefully and the current market dictates that we are more risk-averse as the market is more volatile. We work very closely with our underlying PBs to deliver a specialist service to those small and medium-sized firms who are also working on smaller margins in a fast-moving and sometimes unpredictable market.
Linear has recently taken more of a global approach, including an increased emphasis on the APAC region. What kind of clients and opportunities are you focusing on in APAC?
Linear recognised some time ago that there was a need to support intraday trading clients in the APAC region. My background has been really relevant in us building out a global infrastructure to support active trading, so the region is naturally a target for us and a good fit for our business. A few years ago, we made a strategic decision to focus on Asia rather than the US as our target market. We provide a service that supports a need, and that is one of the first rules of good business. I personally travelled extensively in the APAC region before the pandemic, and I look forward to doing so again as Asia is a big part of my strategic growth plan for the business overall.
How does Linear’s discretionary fund management service fit in with your prime brokerage business?
Our DFM business is a separate line of business for us. DFM and PB are not reliant on each other in the Linear business model. DFM is a relatively new area for us and I see managing money as a very positive growth opportunity across the whole business. We do support our global clients with our DFM offering, our trust vehicle is set up to allow global clients to participate. I think there is always an opportunity, when you provide excellent service to your client base, to be able to approach them and share what other services you have available. A business like Linear is built on the service it provides but also on its ability to innovate, read the market and deliver to clients what they both want and need.
What are the major challenges and opportunities for prime brokers right now?
I see the biggest challenge as the lack of new funds to the market. It’s been an uncertain two years. I see some really positive signs now coming through and really good conversations about strategy, investment and the future. With some of the larger banks pulling out of the PB market altogether, this is our chance to shine. Linear is flexible, agile and ready to do business. We are looking forward to 2022.