Institutional Investor's Alpha Magazine - October 2008 - (Page 80)

Eye of the AS THE HEDGE FUND INDUSTRY STRUGGLES THIS YEAR, IT RELIES MORE THAN EVER ON ITS SERVICE PROVIDERS, RATED HERE IN THE FOURTH ANNUAL ALPHA AWARDS™. he sudden descent of investment bank Lehman Brothers Holdings into bankruptcy last month struck a blow at the very heart of the hedge fund industry. The mounting problems for banks over the past year have only added to hedge funds’ woes, which include generally poor performance, increasingly complicated investment strategies and an ever-changing regulatory landscape. In the current crisis, hedge funds are demanding more than ever from their ser vice providers — not just their prime brokers but their law ﬁrms, accountants and administrators. The fourth annual Alpha Awards™, based on the opinions of hedge fund managers surveyed in late spring and early summer, as it was becoming clear that ﬁnancial markets were in peril, offer a snapshot assessment of how providers were responding. All of this year’s Alpha Award winners — prime broker Morgan Stanley; administrator Goldman, Sachs & Co.; onshore law ﬁrm Shartsis Friese; offshore ﬁrm Walkers; and accountants Rothstein Kass & Co. — have worked tirelessly alongside clients during these tough times, even as they might have been having troubles of their own. Grand Cayman–based Walkers opened a pracAlpha Awards™ tice specifically to help distressed hedge funds Top Firms through the mess. “Just Accounting because a fund has an issue Rothstein Kass & Co. and raises it with us does Administration Goldman, Sachs & Co. not ultimately mean that Law — Offshore every one of them is going Walkers to end up in liquidation,” Law — Onshore says Walkers partner Sandie Shartsis Friese Corbett, who heads the Prime Brokerage group. Corbett says that, to Morgan Stanley avoid shutting down, more 80 • INSTITUTIONAL INVESTOR’S ALPHA • OCTOBER 2008 ST funds will either suspend redemptions or create side pockets for troubled assets. Prime broker Morgan Stanley, an Alpha Award winner for a fourth year running, is among the many ﬁrms emphasizing more advisory services for clients. “There are a lot of funds that are down this year,” says Stuart Hendel, head of Morgan Stanley’s global prime brokerage business. “It has been tough sledding.” Though Morgan Stanley reported record prime brokerage revenues in its third-quarter results, even that ﬁrm was not immune to the client ﬂight from investment banks. After Lehman’s collapse clients began to take prime brokerage money out of Morgan and Goldman, and by early October, Morgan looked to have lost as much as 30 percent of its prime brokerage assets, according to published reports. The credit crisis that engulfed the markets arrived in waves. First came the Federal Reserve Board–backed shotgun sale of Bear Stearns Cos. to JPMorgan Chase & Co., then Bank of America Corp.’s agreement in September to acquire investment bank Merrill Lynch & Co., the near-failure of insurer American Insurance Group and the transformation of Goldman Sachs and Morgan Stanley into commercial banks, not to mention along the way the government takeover of mortgage lenders Fannie Mae and Freddie Mac. Next came the hugely unpopular $700 billion bailout package. In the uncertainty that persisted, the government stepped in to backstop more banks, and Morgan Stanley sought shelter in the form of a $9 billion capital infusion from Mitsubishi UFJ Financial Group. Recent events call to mind the failure a decade ago of $4.6 billion Greenwich, Connecticut–based hedge fund Long-Term Capital Management, which caused such problems among its big bank lenders that the government had to intervene, pushing the banks to take over management of LTCM’s remaining assets. Though LTCM’s fall now looks small by comparison, other hedge funds went under then too, some bank and investor losses were con- T

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - October 2008

Institutional Investor's Alpha Magazine - October 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Process of Evolution The Good Guys: Israel's Champion Interview: Fast Lessons for Hard Times Cover Story: Industry Under Siege The New Hedge Fund Economics Good-Bye, Easy Money Caging the Shorts Strategies: Bottom Fishing Profile: Cult of Personalities Research Center: Alpha Awards: Eye of the Storm Alpha Bytes: Funneling the Chatter Unhedged: Commentary: Attention, Hedge Fund Shoppers

Institutional Investor's Alpha Magazine - October 2008

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