Merrill Boosts Prime Brokerage, Targets Multi-Strategy Funds

Date: Wednesday, March 26, 2008
Author: Tomoko Yamazaki, Bloomberg.com

March 26 (Bloomberg) -- Merrill Lynch & Co. boosted its hedge fund clientele by 50 percent in a year and is targeting multi-strategy funds seeking to do business with more than one prime broker, managing director Jeff Penney said.

The biggest U.S. brokerage aims to benefit as hedge funds move away from relying on a single prime brokerage, driven by growing client demand and the need for different sources of credit, which has become harder to get amid the U.S. subprime- mortgage crisis. Assets of multi-strategy hedge funds, which make a variety of investments from stocks to convertible bonds, grew more than sevenfold in the past five years.

``Hedge funds that are relatively healthier and are doing extremely well in this environment are multi-strategy and multi- asset class,'' Penney, co-head of Merrill's global markets financing and services unit, said in an interview in Tokyo yesterday. ``We've got a considerable backlog of clients trying to open agreements with Merrill and we're a beneficiary of the trend toward multiple prime brokers.''

Revenue and assets from Merrill's prime brokerage business, which provides loans and securities lending and processes trades for hedge funds, rose about 50 percent in the past year, he said.

The number of multi-strategy hedge funds almost doubled to 844 at the end of 2007 from 423 in 2002, according to Eurekahedge, a Singapore-based research company. Their assets grew to $272.6 billion from $35.7 billion, Eurekahedge said, translating to an annualized growth rate of more than 50 percent.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

Bear Stearns

After Bear Stearns Cos.' collapse last week, Merrill fielded calls from more than 20 hedge funds in three days that were looking to do business, said Penney, 47.

New York-based Merrill ranked third in the prime brokerage business by revenue and assets at the end of 2006, based on its latest internal ranking, falling behind Goldman Sachs Group Inc. and Morgan Stanley.

Merrill increased staff at its prime brokerage unit 20 percent in the past three years to meet growing demand, Penney said. The firm hired bankers from competitors including Goldman and Morgan Stanley and added sales staff in offices including Sydney and Singapore. It also plans to add staff in Hong Kong, he said.

Institutional investors, under pressure to boost returns as U.S. subprime loan problems rattle global financial markets, are putting more money into hedge funds because they take bigger bets and aim to make money in both rising and falling markets.

About 22 percent of the 1,023 institutional investors and pension funds surveyed last year by Greenwich, Connecticut-based consulting company Greenwich Associates said they planned to increase hedge-fund investments by 2009.

``Our goal is to become the provider of financing and securities lending to all the largest hedge funds and asset managers,'' Penney said. ``You cannot be a securities firm and not be in the prime brokerage business.''

To contact the reporter on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net