Morgan Stanley Offers Investors in Hedge Funds a New Option

By AARON LUCCHETTI Morgan Stanley is planning more changes in its prime-brokerage division to lure back some of the hedge-fund clients that left the firm last year. The New York firm plans to announce as soon as Wednesday that hedge-fund clients will be allowed to hold part of their assets in Morgan Stanley Trust National Association, a trust company owned by Morgan Stanley. Previously, such assets were held in the firm's brokerage units. The move is meant to reassure clients concerned about a potential repeat of the panicked market conditions last fall, when many hedge funds feared for the safety of their money after the collapse of Lehman Brothers Holdings Inc. More Morgan Stanley to Repay TARP While Morgan Stanley's bond and stock prices indicate that investors have grown more confident about the firm, the new option for hedge-fund clients will offer "a belt-and-suspenders approach" for those who still are concerned about protecting their assets, said Rich Portogallo, Morgan Stanley's head of institutional clients and services. The company is expected to charge additional fees for clients that leave their securities in the trust company. In May, hedge funds soaked up net cash inflows for the first time in 10 months, Eurekahedge said Tuesday. May also delivered the best hedge-fund performance in years, according to various fund trackers. Hedge Fund Research Inc. also said the pace at which funds are closing has slowed, with 376 funds liquidating in the first quarter of the year, less than half the number of closures in the final quarter of 2008. Morgan Stanley's planned announcement comes amid a wider effort by many hedge funds to make sure their assets are safe during market tumult. After Lehman's bankruptcy filing last September, some found they couldn't get their money back from that firm. Other banks offer services that are similar to Morgan Stanley's, but the company's hedge-fund efforts are being closely watched because the firm lost a significant chunk of that business last year and has made personnel changes in its prime brokerage unit. The firm has brought many clients back, but balances are still down from the peak last year. Securities held in Morgan's trust bank won't be federally insured like deposits, but could be viewed as safer because they are housed separately from the firm's broker-deal operation. Morgan Stanley Trust National Association, regulated by the Office of the Comptroller of the Currency, has 52 employees and about $14 million in total assets, according to a regulatory filing. —Gregory Meyer contributed to this article. Write to Aaron Lucchetti at aaron.lucchetti@wsj.com