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Hedge funds flee to safety of large institutions

Date: Friday, September 19, 2008
Author: Greg Farrell and Henny Sender, Financial Times

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Scores of big hedge funds have been shifting billions of dollars in prime brokerage business away from Morgan Stanley and Goldman Sachs to operations housed in large commercial banks, in what is being viewed as a massive flight to safety, write Greg Farrell and Henny Sender in New York .

Traders at JPMorgan Chase, Citigroup, Deutsche Bank and Credit Suisse are among those who describe themselves as "inundated" with business from hedge fund managers moving their trading and execution away from the last two remaining independent investment banks.

In recent weeks, prime brokerage business had been migrating away from Lehman Brothers, as the market perception of that firm began to worsen.

But after Lehman's collapse into bankruptcy protection on Monday, along with Merrill Lynch's decision to be acquired by Bank of America, the gradual ebb of prime brokerage business away from the independents rose to a flood.

APG, manager of Europe's biggest pension fund, said: "We have stopped stock lending in several American, but also European, banks whose shares face the most downward pressure, among others, from short-sellers."

One of the biggest beneficiaries has been JPMorgan Chase, which acquired Bear Stearns in March largely for Bear's strength in prime brokerage. But executives at that bank have warned subordinates not to actively solicit any business from Morgan Stanley or Goldman.