One of the advantages of a hedge fund versus a mutual fund is that hedge funds are allowed to short, that is bet against a stock or bond. In order to execute this transaction, they must first borrow the shares before the trade. Where do they get these shares? From their prime broker.
Securities Lenders obtain access to multiple institutions that have stable holdings. These are generally pension funds and large asset managers. They would receive some fee from the Securities Lender in exchange for the stock loan. Depending on the agreement between the fund and prime broker, they may even retain the dividends paid out on the securities. Here is where an investment bank with a healthy asset management division would have an advantage.
The prime brokers can lend from this pool of securities to the hedge funds to execute their short trades. The fund can cover their position and return the securities at the end of a profitable (hopefully) trade.
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