Financial crisis: Hedge funds flee Morgan Stanley

Worried that global financial services provider Morgan Stanley may land into financial troubles like Lehman Brothers, several hedge funds fled the bank resulting in a loss of billions of dollars in its prime brokerage business last week, a media report says.

"Many of the world's biggest hedge funds moved their assets to commercial banks regarded as safer last week, as they and their investors worried that Morgan Stanley could follow Lehman into trouble," the Financial Times said.

Quoting people familiar with the business Financial Times said, "Losses will deal a big blow to Morgan Stanley as its prime brokerage is one of its most profitable and successful businesses."

The withdrawal of client assets is likely to make Morgan Stanley's business less profitable by restricting its ability to fund loans to hedge funds from balances left by other hedge funds, FT added.

Hedge funds are pooled investment funds, usually a private partnership, that seeks to maximise absolute returns using a broad range of strategies, including unconventional and illiquid investments.

The prime brokerage business reported record quarterly profits this week and it seems to have stabilised after the proposed US government bailout led to soaring markets.

FT said Morgan Stanley declined to comment on the

flight of cash and stock out of the division that occurred as the credit default swap market ballooned.

Several of Morgan Stanley's hedge fund clients are likely to return to the bank once markets stabilise, the daily said and added that the prime brokerage, which provides hedge funds with custody and loans and assists short selling, is highly rated by many managers. 

Morgan Stanley's London prime brokerage business lost close to half of its assets, as hedge funds were worried about fellow funds caught up in the collapse of Lehman that found they could not access assets in its European arm.

Despite efforts by Morgan Stanley's executives to persuade rivals not to approach customers, banks such as JPMorgan, Credit Suisse, Citigroup, Deutsche Bank, Barclays Capital and UBS attracted many of their clients, report added.

The bankruptcy filing for Lehmans brokerage subsidiary was delayed for several days allowing many funds to move elsewhere, but the London business was put straight into administration, trapping an estimated $40 billion of hedge fund assets.

Towards the end of the week several rivals said they had dropped internal restrictions on approaching Morgan Stanley clients.

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