In the prime-brokerage business, being the prime choice of hedge funds is becoming more of a challenge.

As hedge funds grow in size, complexity and clout, many investment managers are finding that a single prime broker isn't enough to meet their expanding list of demands. Prime brokers help hedge funds manage their trades with multiple firms and also provide lending, portfolio reporting and custodial services, among other things.

These days, the term "prime" brokerage is starting to look like something of a misnomer, as more hedge funds are using multiple prime brokers for their trading, borrowing and portfolio-monitoring needs.

Some 56 percent of hedge funds managing more than $1 billion in assets have more than four prime brokers, and half of those, 28 percent of the full group, use seven or more, according to a 2005 survey by the Tabb Group, a financial-markets research and advisory firm. Almost all the smaller funds surveyed had one to three prime brokers.

Prime-brokerage firms were developed in the early 1980s to help fund managers keep track of transactions and positions with different firms through a central "master account." In recent years, the explosive growth of hedge funds has made the business a major contributor to the bottom line of many Wall Street firms.

For years, the industry has been skewed toward the "Big Three" of prime brokerage: Goldman Sachs Group Inc., Morgan Stanley and Bear Stearns Cos., which command a 65 percent share of all prime-brokerage business. Revenue from prime-brokerage operations totaled some $7.5 billion in 2005, according to estimates from Sanford C. Bernstein & Co. Most prime-brokerage revenue comes from fees charged on stock loans and financing, with trading commissions making up a smaller portion.

"Most big funds use many prime brokers, which turns the concept on its head," says Michael Roth, a founding partner of Stark Investments, which manages more than $7.5 billion in its various hedge funds. Stark has a "core group" of six to eight prime brokers and relationships with as many as 20 smaller outfits.

The decision to work with many firms is tactical, Mr. Roth says. "They bring different things to the table, and we can sometimes use those multiple relationships to obtain better terms and rates," he says, adding that Stark can limit its risk exposure to any one firm.

"There's no doubt that the prime-brokerage industry is an oligopoly right now," says Christopher Kundro, managing director of consulting firm BearingPoint Inc. "But the move toward multiple prime brokers has opened up the market for smaller players, who may not offer the same broad-based services as the big firms but specialize in different areas."

To be sure, many of these smaller players are units of some of Wall Street's biggest names, including UBS AG, Citigroup Inc., Lehman Brothers Holdings Inc. and Deutsche Bank AG. Several boutique firms have jumped into the prime-brokerage business, including Grace Financial Group LLC in Southampton, N.Y., and M.S. Howells & Co. in Scottsdale, Ariz. Some firms specialize in structuring complex derivative transactions, some have become particularly good at finding "hard-to-borrow" stock for hedge funds to sell short when they expect the price to fall, and others have developed software applications for portfolio valuation and risk analysis.

Maintaining several prime-brokerage relationships also appears to tie in with the secrecy surrounding many hedge funds, whose managers may rest easier knowing that no single broker has records of all their investment positions and strategies. As many prime-brokerage operations are run by firms that also have large proprietary trading desks, some funds fear that their information could be used improperly.

The big firms, however, insist there are strict controls to safeguard client confidentiality. "We have elaborate structures in place to segregate information in different divisions and to prevent any leakage, accidental or otherwise," says Alex Ehrlich, head of prime brokerage at UBS.

Others, like Fidelity Prime Services, which is part of Fidelity Investments, say they avoid conflicts altogether because they don't engage in proprietary trading. "There won't be a case when both we and our customers are trying to employ the same or competing trading strategy," says Mark Haggerty, president of Fidelity Capital Markets, a division that is separate from Fidelity's mutual-fund business.

Not all midsize and large funds are loading up on prime brokers or going for the big names. Endowment Management LP, a midsize investment manager, decided sticking with a single prime broker makes for simplicity and more personalized service. Six months ago, the firm moved its account from a major brokerage firm to Merlin Securities LLC, a two-year-old prime broker in San Francisco that seeks to differentiate itself with client service and sophisticated technology for portfolio reporting. "What we really wanted were highly customized reporting tools," says Blaine Klusky, chief operating officer of Endowment Management. "And if we need any help, we have a direct line to their chief technology officer."

Aaron Vermut, a managing director at Merlin, says his firm saw an opportunity in servicing hedge funds with assets of $100 million to $2 billion. "We felt that a large portion of the market was being underserved, as the big prime brokers were all targeting primarily the largest funds," he says. "By providing service, technology and even multiprime reporting, we are trying to take prime brokerage to the next level."