Which entity executes trades on behalf of hedge fund managers?

The correct choice indicates that prime brokers are the entities that execute trades on behalf of hedge fund managers. Prime brokers play a crucial role in the operations of hedge funds by facilitating a range of services, including trade execution, custody, and financing. They act as intermediaries between the hedge fund and the market, helping to access liquidity and providing the necessary infrastructure for executing a diverse array of investment strategies.

Prime brokers also offer services such as margin financing, securities lending, and risk management tools which are essential for hedge fund managers to operate effectively. This relationship enables hedge fund managers to focus on their investment strategies and portfolio management, as prime brokers handle the execution aspects of trading.

In contrast, clearing houses focus on ensuring the smooth settlement of trades after execution, while custodians primarily safeguard and manage the assets of the hedge funds. Underwriters work in the context of raising capital for securities and do not engage in trade execution for hedge funds. Thus, prime brokers are the key players in executing trades for hedge fund managers.