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Prime brokerage: All change in prime brokerage

Market share expected to be more evenly spread.

In just six months the make-up of the prime brokerage market has completely changed. Previously dominated by Goldman Sachs, Morgan Stanley and Bear Stearns, the industry looks set to be led more evenly by about six key players, with hedge funds dividing assets among them rather than having a core prime broker.

Nervousness about the future of the independent investment banking model caused many hedge fund clients to reduce their exposure to Goldman Sachs and Morgan Stanley in September, say staff at other prime brokers.

One head of prime brokerage at a bank says that the collapse of Lehman Brothers led to the latest surge of movement among prime brokers. Panic ensued when Lehman announced bankruptcy in September and billions of dollars-worth of prime brokerage assets were frozen at the European arm of the bank. Although Lehman was rarely a sole prime broker to hedge funds, and was rather used as add-on for specialist needs in fixed income or enhanced financing, its bankruptcy and freezing of assets caused hedge funds to question all of their prime brokerage relationships. "For a couple of years now, large sophisticated hedge funds have been diversifying their prime brokerage providers but the Lehman debacle really focused people’s minds on where their assets are being held," says the banker.

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