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More slices, but how big’s the pie?

The switch in hedge fund strategies away from equities has brought new competition to prime brokerage. But what does it amount to in terms of bottom lines?

INCREASED COMPETITION AMONG banks and the changing strategies of new hedge funds are transforming the prime brokerage business. Banks have piled into prime brokerage over the last few years and new entrants have been particularly keen to establish themselves by catering to the fast growing - though less profitable - segment of non-equity hedge-fund strategies.

This is starting to eat into the Morgan Stanley-Goldman Sachs global duopoly - challenged only in the US by Bear Stearns. There are now nearly 30 prime brokers in the US, and in Europe there are 15, compared with nine as recently as 1999. Morgan Stanley, Goldman Sachs and Bear Stearns still collectively manage most hedge-fund assets, but their share of mandates for new funds is slipping.

A February 2003 survey by Eurohedge shows that the change is most pronounced in Europe, where Morgan Stanley's and Goldman's share of new mandates has fallen over the past year, from 60% of the 149 funds launched in 2001 to just over 50% of the 181 funds launched in 2002. Morgan Stanley, though still the largest prime broker overall, has slipped the most, winning just 36 new mandates in Europe last year compared with Goldman's 60.

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