why are hedge funds important clients of investment banks?

Answer 1

I would say 2 reasons:

(1) Profitability of Prime Brokerage / Securities Lending

Prime brokerage is an immensely profitable area for investment banks, and hedge funds generally need at least one prime broker. (See http://en.wikipedia.org/wiki/Prime_brokerage for more detail on the the role of Prime Brokers.)

(2) High commission potential

Hedge funds often have high turnover and use leverage, so can have tremendous trade volumes. Suppose a hedge fund is running $1 billion dollars, and levers that up to $3 billion long, $3 billion short, and has 100% turnover per annum on the levered amount on each side...then they are going to be spending commissions on $6 billion per year. Thus, the combination of leverage and high turnover make them an important trading client, higher than it would appear from their AUM (assets under management.)

Hope this helped!

Answer 2

the simple answer, cause investment banks make money off of hedge funds. and since some HF's manage multi-billion dollars, they make even more since they are so large.
HF's use i-banks as their 'prime-brokers'...meaning the i-bank holds all their securities, keep track of how much money they have and how much theyve gained or lost, do basic accounting for them, lend money to HF's....etc....and the i-banks all charge a fee for this.
of course whenever a HF trades with an i-bank, the i-bank shaves a little/add a little to the price to make money off of them too.

Answer 3

Leverage