Hedge funds reassess prime broker risk - FT

About 100 hedge funds that used Lehman Brothers as their prime broker had positions held via the failed bank frozen on Monday as administrators took charge of the London business and the US holding company filed for bankruptcy. Many hedge funds had already abandoned Lehman, shifting balances from the prime brokerage to rivals amid widespread worries about the bank and its plunging share price. But those funds that remain with the bank face uncertainty and possible losses of assets, with several funds and a Lehman broker on Monday saying positions held in London had been frozen. Lehman did not return calls seeking comment. The collapse – the biggest bankruptcy in history – prompted many funds to reassess the riskiness of their prime brokers, divisions of banks which provide leverage to hedge funds and help them sell stocks short. “Lehman makes us worry about prime brokers that don’t have a commercial bank with deep pockets standing behind them,” said one hedge fund manager. Lehman was the sixth largest prime broker in Europe by assets at the start of the year, but had only 33 sole mandates, mostly sharing business of bigger funds, according to data compiled by Eurohedge magazine. No data was immediately available on its US business, which hedge funds said continued to operate. But many of the hedge funds have switched to prime brokers which are part of bigger banks, a series of former clients said on Monday. “In the last two to three weeks everybody ran for the doors,” said one hedge fund which retains small balances with Lehman. “I don’t think this is a systemic risk issue, as lots of people had taken precautionary measures.” The collapse will be galling for hedge funds, which had long been seen as the riskiest part of the financial system and now find themselves exposed to a failed bank. But it also exposes the complex web of relationships, with managers, investors and lawyers struggling on Monday to understand where they stand legally in relation to assets Lehman held. Lehman subsidiaries in the US remained outside bankruptcy after the Chapter 11 filing of its holding company, allowing them to be wound down. But Lehman’s London operations – which include the international prime brokerage – were put into administration, and many US hedge funds held their accounts in London, rather than New York for tax reasons. Many hedge funds assumed after the failure of Bear Stearns that governments would step in again to force a rescue of a big bank in trouble, but post-Lehman several said they were re-examining relations with broker-dealers. Lehman also owns stakes in a series of hedge funds, including 11 per cent of New York-listed GLG Partners, 5 per cent of London-listed BlueBay, and 20 per cent of privately-held DE Shaw, Ospraie Management and Spinnaker Capital. On Monday GLG fell 55 cents, or 7 per cent, to $7.23.